I really like destroying commonly held perceptions. So here’s another shot: The future of domaining doesn’t lie in domaining per se, but in finance. Finance is where the new domain fortunes will be made. Knowing the domain game won’t be enough to make you rich anymore.
Let’s look at the development of domaining from a slightly historical perspective. The first guys in the biz (such as Scott Day) saw the value of domains as brands, gateways to the internet, that should be valuable one day. That was their edge. Then guys like Frank Schilling and Kevin Ham came in that understood the value of type-in traffic and built their empires around that (banking on the assymetry of information – most people didn’t understand it). That was their edge. Then came the big tasters. Their edge (already understanding type-in traffic) was in technology, acquiring tasting data and seeing the opportunity that many did not see. From this “historical” point of view we can basically break this down into three evolutionary steps, let’s call it generations – that made a killing in the domain business.
So what is the fourth generation, the next evolutionary step? I believe it is going to be about combining domaining and modern day finance. That’s where the fourth generation domain fortunes will be created.
And that’s exactly where I think my edge is (not that I would want to put myself in the vanguard of this next generation 
). You see, when I came into the domain business a little over two years ago, I saw it through a different lens than most people in the business. I simply saw domains as any other asset that creates a cashflow stream (predominantly from PPC). So there was a huge arbitrage opportunity.
This lied and still lies on the ability to raise debt for cheaper than the yield that a domain generates. Say you would buy a great generic for 10 years revenue for $1 million. The cashflow stream is hence $100k per year. Now if you have the ability to raise that amount in debt say at 6% p.a., servicing the debt is going to cost you $60k per year. So you get to pocket the difference (+you have the added benefit of the capital appreciation of the domains). Then you just need to find a way to scale this to make a lot of money. Obviously raising the debt against domains is very difficult so you really have to get creative.
Bringing in aspects of financial engineering is where the new fortunes in domaining are going to be created. However with the introduction of leverage, some fortunes may be also lost (that is the downside). So if you want to make a lot of money in domaining, stop reasearching just domains and look into how private equity works.
Lookig forward to hear your thoughts in the discussion.
Incoming search terms:
- financial engineering in LBO
#1 by Aris on February 22, 2010 - 03:56
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The three previous “generations” that you mentioned are scalable and can be automated.
For this new model, you did say:
“Then you just need to find a way to scale this to make a lot of money.”
The big question is how? You’d need to manually find profitable type-in domains that are available for sale and raise the funds. I don’t see how this process can be automated or being done in big scale… You’d need to do this by yourself, one-by-one, or employ some people to acquire the domains for you.
Is there any other way?
#2 by Louis on February 22, 2010 - 04:54
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Before traditional financing comes, their needs to be a mechanism to prove ownership of the asset. No traditional institution will offer financing if their is not a way to prove title of ownership. Some form of title issuance in combination with a form of title insurance will need to be developed before any semblance of mainstream financing enters the industry.
#3 by Luke Webster on February 22, 2010 - 05:42
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Financing is on the way. I have been pitching this and working with Wells Fargo commercial lending on Domain Financing. Currently I can finance a portfolio with collateral however times are changing and soon we will have Domain Title Insurance and legitimate financing. Its in the works.
@Aris The “automation” comes around development. Mass Domain Development and I am not talking about spam blogs. Real sites built out on a massive scale over time with no shortsighted PPC, CPA, Affiliate Links etc…. With development comes scale. Then these sites are bundled into niche’s and sold to investors based on niche, traffic, cpc, advertising etc…
Its still the wild west but times are changing. Domaining is still one of the few places you can go and buy an asset that pays for itself in a few months…
Luke
#4 by Mike on February 22, 2010 - 16:43
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I have been thinking along these lines as well. However it is going to be tough to project forward ppc revenues in this market, as I believe they will continue to decline over the next few years. Type in traffic will also continue to decline. Some recent UDRP decisions are also a reason to be concerned about investing in domain names at this time, as seen in the Hayward.com domain case.
That being said, I am currently pooling together some private local investors to make a run at some pretty good names. One of the big selling points is that you do own an asset. An asset that has the ability to pay for itself in 5-10 years. With the value of domains being as low as they are, now is the time to do this. There are not many places to invest your money these days that offer such returns.
#5 by Aron on February 22, 2010 - 17:45
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If you guys find some top tier generic domains that
will sell on a 5 year PPC multiple… contact me.
Those are extremely hard to find — and don’t pop up often.
It’s a good plan, but there aren’t not enough big names selling at prices like these to assume you can buy dozens of domains for a business.
Again, if you spot one… I’ll be the first buyer.
I do agree that creative financing will be the key to success for some people, but (so far) only a few companies will loan on a domain.
Any major lending institution will need a personal guarantee, or cash reserves equal to the amount of your note.
Aron
XF.com
#6 by The man on February 22, 2010 - 19:28
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I like this stuff keep it up
#7 by Luke Webster on February 22, 2010 - 20:47
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@Mike the key is not to build it on a PPC model. You will need media contracts with advertisers. Real contracts in writing with yearly escalator clauses… To a bank or a lender that is real.
Those are the kinds of solutions we are putting in place and working on for our clients and their portfolio’s. The road is not paved… It’s really not even built but the destination is clear.
Luke
#8 by The Liquidator on February 22, 2010 - 22:06
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I find the information being traded on this blog to be extremely valuable for anyone involved in this broad industry some readers here call Domaining. There are many of you here that have truly grasped the direction things are going and how to try and capitalize on these concepts. There has been, continues to be and will be great amounts of money to be made.
I am familiar with this young blogger’s more serious entrepreneurial efforts in the mobile marketing services arena and his other internet media-based companies. Having worked for many years as a Wall Street analyst focusing on the media and advertising sector, I am looking forward to continued readings! Besides, as an “old retired” guy, it gives me something to do these days.
Just remember folks, where the cash-flows, the smart money follows. Keep up the great work Jan! All my best to Petr and the rest of the gang.
#9 by Sisyphus on February 22, 2010 - 22:10
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Thanks for the kind words, will do
#10 by Logan on February 23, 2010 - 17:52
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I’m a CFA, so I have an opinion on this.
Why go into debt? You’d only be increasing your risks and collecting liabilities in addition to collecting domain assets when what you really want is to only collect domain assets. It would be far preferable to keep the domain name but sell the future cash flows to investors who pay you today for the risk of collecting those future cash flows later. You’d be selling those future cash flows at a discount, of course, but your cash flow risks are transferred to the investors, you have additional cash on hand today, you maintain ownership of the domain asset, and you completely avoid taking on the risks of debt, default on that debt, and having to hand over the domain name to lenders after you default due to the domain name serving as collateral on the loan. Granted, you probably couldn’t scale up as much or as fast as you’d like to, but just look all around you at all the financial failures and bankruptcies due to too many people taking on too many debts over the past few years (not to mention governments — Greece? USA? etc.)
Logan.
#11 by Sisyphus on February 24, 2010 - 09:06
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Logan, it really boils down to how much risk you have balls to take on. If you want exceptional ROI (in exchange for more risk), you have to mix in the leverage in my view. I seem to be a bit of an adrenaline junkie, so my views on this are very aggressive.
#12 by Logan on February 24, 2010 - 18:30
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The bigger you let your balls get, the more likely you are to trip, fall, break your head open and bleed to death. Just sayin’.
Also, re: ROI — you can’t put %s in the bank. Free cash flow will always be king, and interest and principal payments eat into free cash flow every time.