chanllenges of running a business in a country town
challenges of running small business
challenges in running a business
I happen to live and run my businesses from a country that most Americans can’t point out on a map or still call Czechoslovakia (which is totally understandable, I couldn’t name the 50 US States either). Although I am obviously a big Czech patriot, I would still like to ventilate my frustrations of operating a business from a country that has a population of 10 million. It makes competing on a global scale much more difficult and me and my team have to go the extra yard to be better.
The most frustrating thing is the size of the market – 10 million people with a GDP per capita of $24k at PPP. Compare that to the U.S. with 300 million people / $46k and you find out that the US is roughly a 60x bigger market than the Czech Rep when it comes to buying power. Because of all the language barriers and unique aspects of every European country, it is very difficult to scale a project/service once you reach a certain level. Being part of the EU has certainly helped, but the EU is certainly not a federation of states like the US. Just to illustrate this frustration with an example – take our lead generation department within Elephant Orchestra. Lead Generation is in many ways a local service – you have to be close to your customers (lead buyers) and you have to understand the local market for acquiring traffic. What is currently frustrating us here is that we are hitting a major constraint in the amount of traffic we can profitably buy and convert. If we want to grow, we have to expand into other lead gen niches (like health, education) or expand abroad. But expanding abroad is very difficult since you have to build up your knowledge and a team from zero and that costs money. Whereas if we would have a US presence, it would be much more easy to scale our model and maintain margins.
Then there are several frustrations of running a global business from here, again to illustrate, I will use the example of Elephant Traffic. First of all, if we want to sell in the US, we have to understand the language. The HR pool of native speakers is really tied to the expat community. Or we have to “import” the people. Second is the travel barrier, if we want to meet our clients, we have to be constantly travelling, which increases costs. Then there is the time difference, hence our sales people and account managers have to work the US time zone, which means coming to work at 3 p.m. and finishing at 12 p.m. Again that limits the HR pool, a lot of people don’t want to work those hours. Then there is the issue of knowledge exchange – there are virtually no people that would be in a similar business as us, so you can’t refine your ideas, network etc. Then there is the mindset. Czechs typically have a pretty provincial way of thinking (recommend reading the book Good Soldier Svejk to understand). It is difficult to transplant “global thinking” into them.
Obviously there are certainn advantages of operating from the CZ such as well educated cheaper labour, maybe a more favourable tax climate, it’s easier to become a market leader here etc. But really the dissadvantages are still much bigger. Hence I think it is inevitable for us to open a US presence next year. That will allow us to both exploit some of the favourable aspects of the CZ but also make it easier for us to compete with the global players. Take the best of both.
I see a lot of domainers diversify into real estate when they start making money. They view it as something similar to domains. The truth is that they would have been much better off if they would have kept re-investing in domains or other businesses.
My perception is that real estate investments are a sinful waste of money, money that maybe yields 5% per year. For us domain investors that is a petty return. If I would have a choice, I would prefer to have money in the bank than in real estate. Because it’s liquid and available for opportunistic deal making and this liquidity outweighs the forgone yield for me.
The main arguement made by domainers is that real estate is a very secure investment. Every domainer has paranoias that his domains might be taken away but he knows that nobody is going to take his house away. Hence they sacrifice yield in favour of security.
The big secret is that you do not have to sacrifice yield in exchange for security. The answer is diversification. If you have a diversified portfolio of high yielding investments (like domains) or businesses (obviously running the risk that some of these may default/go bancrupt) you will still be better off in the long run than if you plow money into real estate.
I like to illustrate things with analogies, so here’s one from the bond market. In the long run, a well diversified portfolio of junk bonds will perform better than a portfolio of tripleA rated bonds. Some of the junk bonds will obviously default, but the higher yield of the others will more than compensate for this in comparison to the AAA’s.
I was just looking through Bido at the recent sales page. Since Bido get’s so much PR and buzz, I was really surprised about the miniscule amount of volume in dollar terms. Looks like on a typical day maybe $1,000-$1,500 of sales go through. That’s $100-150 of margin for Bido a day. And a hell of a lot of effort is put into that from Sahar’s team with no doubt to even get that result. I don’t really want to show off or anything, but just to put that number in context, I make that kind of money in less than 10 minutes, 24 hours a day, just from parking.
What the example of Bido clearly shows us is how difficult it really is to create a new viable aftermarket platform and especially get the model right. I think Sahar&co will really have to fundamentally change Bido’s model and I sincerely wish them a lot of luck, because any efforts like this help increase liquidity, which is always positive for all of us.
Overall, if you look at the various aftermarket platform models, I think only some work very well, some moderately and some don’t at all.
Somebody who I think got the aftermarket model working really well is Namemedia with BuyDomains etc. Why it is so nicely profitable is that to a large degree, Namemedia is what I call in the business of proprietary domain trading. They own the inventory (or most of it) that they sell, hence their margins are really thick. Whereas others just rely on their 10% cut, Namemedia takes almost 100%. That’s why they can market their names proactively. Dark Blue Sea has been trying to do something similar to that with it’s Domain Distribution Network, but they are clearly not even close to as good as NameMedia is on this.
Another aftermarket model that I think makes a lot of sense is the dropcatching-to-auction model of Namejet, Snapnames and Pool. If you create liquidity in the marketplace, you can snap up domains for $7 and sell them for $79 or even thousands of dollars. Obviously most of the inventory comes from preferred registrar partnerships so the margins are not that high (as they have to give a big chunk to the registrars), but these dropcatching services definitely take a bigger cut than 10% that for example Bido or Sedo rely on.
Rick Latona gets it right as well through his whole aftermarket package (newsletter, auctions, active brokering). He also engages in what I call a lot of proprietary trading, a lot of the inventory he sells is his.
To a lesser degree I don’t think the whole marketplace model of Sedo (on a standalone basis) is that awesome and profitable. On a typical month, Sedo sells something like $6 million in inventory, with a 10% margin of $600k roughly. However Sedo has a HUGE overhead to keep this operation running, spends significant amounts on marketing etc. There’s probably very little left of the $600k a month after all the costs. However why this model seems to work is the marketplace’s impact on Sedo’s parking business. Because of the marketplace, Sedo gets a lot of parking business, where it can make thicker margins. Pretty much all the small guys making $50 a month on parking park with Sedo now, but they probably have thousands or maybe even tens of thousands of them so it adds up. The impact of the marketplace on the parking side of the business is exactly why Namedrive went into this business with its NDX Market. Overall clearly, on a standalone basis, the marketplace model is nothing very profitable.
So bottom line is that if you want the marketplace model to work, you really need some kind of upsell to make it work – to parking, a registrar or something like that.