This is part 2 of a 2-part series on domain names and startups; part 1 was “Should a Startup Spend VC Funding on a Domain Name?”.
(This bench at Cathedral Lawn is engraved with country domain names such as .uk, .us, .nz etc. (credit: Wikipedia))
I’ve written in the past about how to identify a great startup opportunity. Let me propose a path few take: find an under-monetized domain name and start a business on it.
The secret of building a business on a Tier-1 domain name is that a great domain name (short, memorable, meaningful, .com, etc.) is worth millions—if and only if a real business can monetize it. ff Venture Capital has numerous companies which have acquired or launched with blue-chip domain names, e.g., Alerts.com, Gobbler.com, Identified.com, Patents.com, Phone.com, and Plated.com. Those domains are valuable because of the companies built on them, not because of the domains alone.
You don’t need a lot (or any) cash to get a great domain name. Buying a domain name is like buying real estate – capital-intensive and risky. The last thing a startup needs is MORE risk. That’s why our portfolio company Plated.com decided to structure a lease option – they offered the prior owner a small monthly lease fee for 1 year, with an option to buy at the end of the year. This way, if the business was thriving and Plated had managed to attract capital, they’d be able to purchase the domain outright. If not, the current owner would earn a healthy rent for his (as of then unused) domain and would still retain ownership. In the end, Plated was able to use the domain to prove out its minimal viable product for a nominal amount of cash, raise capital, and purchase the domain in full.
Ari Rabban, CEO of our portfolio company Phone.com, said, “I saw many great business opportunities in the telecom space fail because of marketing. When I had my idea for a virtual / cloud-based phone system, I could not imagine the ability to work with such a domain, so it was a no-brainer when I had the opportunity to build on the Phone.com domain. It gives us instant credibility, high visibility in the search engines, and significant traffic, even apart from the value of the services we have built on top of it.”
Most startups fail, but building your startup on premium internet real estate can significantly lower your risk. “If failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for start-ups is 30 to 40 percent.” according to Shikhar Ghosh, a senior lecturer at Harvard Business School. “If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent.” I’d like to reduce the odds of you falling into the failure bucket.
According to Braden Pollock of Legal Brand Marketing, approximately 50 million names – 20% of all registered domains — are parked. These domainers are waiting for a real business to come along and offer 3-8 figures for their name. Many of them have been holding valuable domain names since the mid-1990s, and still haven’t monetized them. That pressures their asking price down, given they’ve been holding some domains for a high percentage of their total career. The traditional ways they’ve monetized domains – type-in traffic in particular, but also lead generation—are not working as well as they used to.
As an entrepreneur, you can identify un-monetized or under-monetized domain names, and then approach the owner with your startup idea. They’ll very likely be amenable to giving you use of the name, and may also have capital to contribute. Aaron Patzer, for example, knew that Mint.com was a valuable domain name, but couldn’t afford it initially. So he sold the owner some equity in his startup, which was worth a few million dollars when Mint exited. Another route is to approach a lender like Domain Capital that is familiar with the industry and will finance the domain at rates far better than traditional financing. Some lenders can provide loans at around 12% annually, according to Braden Pollock.
To find under-monetized domain names, think of characteristics that give domain names inherent value (usage, memorability, industry-relevance, brand-able etc.) . Look up the domains pertinent to your areas of expertise, and see which are parked or resolve to an underdeveloped mini-site. If you have industry background in patents and see, for example, that patents.com is not monetized as much as you think it should be, then you should start thinking about a business you can build on that real estate.
More generally, look for high quality names that have low traffic. These domains are likely under-monetized. A simple tactic would be to employ an automated process to collect traffic data for domain names corresponding to each of the 100,000 most used English words or search terms. Graph usage against traffic and investigate those names which fall significantly below the line of best fit. If you’ve done this and can share the results, please note in the comments. Google Adwords Keywords Tool is helpful for this exercise.
Another option: look on the sites of such domain name investors as Archeo, Demand Media, GlobalVentures, iREIT (portfolio handled by DomainHoldings), Oversee.net, and World Accelerator. You can also look on the domain name marketplaces, such as Sedo.com (the largest), AfterMarket.com, Afternic.com, BuyDomains.com, DomainMarket.com, or DomainNameSales.com.
Until domain names are developed, domain owners monetize their domains through platforms (e.g., the services provided by DomainSponsor.com, owned by Oversee.net) which manage parked pages. These pages generate related text ads that monetize the traffic visiting the sites, but they are usually low value to end users. Which business has more value?:
1) A website about all things plates: china plates, replacement plates, etc., OR
2) A site that does most of the food prep for you, so you can focus on eating fresh home-cooked food, with the high-credibility name “Plated.com?
Clearly, the real operating business will have more value in the long run…but a high quality team has to build it. I mentioned earlier World Accelerator.com, a unique accelerator program which helps entrepreneurs build value on top of premium domain names. VentureCamp.com is another roughly similar program. Gary Millin, CEO of World Accelerator, said, “We recognize that we have a vast portfolio of underutilized assets in our parked domains and are actively seeking talented teams to partner with for development. Beyond the domain we also strive to provide support to our companies to foster success. Names like calendar.com, fact.com, and teacher.com are among the many names available. We know the right team can leverage these names to accelerate their business and in doing so can create value for themselves and us as partners. Like a VC, we want to see a leadership team with vision and the ability to execute and a strong plan for the brand. If we find the right partner, we can be flexible in deal structures to best align everyone’s interests. We have demonstrated this model can and does work with repeated success. Good examples so far: take a look at Doctor.com which is better connecting patients and doctors, Lawyer.com which is the place people are going to find a lawyer when needed, and USA.com which makes local data on the USA more accessible.”
There is no standard template for a deal with a domain name owner. Each deal is different depending on the domain name brand, your team, your stage and resources, the market opportunity, and personal objectives. Following are some sample terms from Gary Millin that demonstrate the levers that he has used to reach agreements at World Accelerator with its partners:
Upfront: No upfront payment by the team for use of domain to build their business:
Domain contributed to the business, and the team has full benefits of access to the brand to leverage with their customers and partners.
Development Term: During the length of the term for developing the company:
Low cost quarterly or annual payments made to the domain owner. Payments start lower to allow more capital to be invested in the business, and then can grow over time as the business matures.
Potential for agreed-upon minimum milestones to be used to replace or supplement fees as a way to demonstrate the business is being developed.
Ownership and upside can be traded for lowering fees.
Exit: Many options for structuring an exit depending on the objectives of the entrepreneur.
Fixed price buyout so that the team retains the upside for their hard work and success.
Ownership for the domain owner can be offered to provide upside and reduce the fixed cost buyout amounts. Gary said they usually get very excited about the companies they end up working with, and prefer to trade some fixed cost for more upside opportunity.
In some cases where a balloon payment might not make sense, there is also the opportunity to provide instead for ongoing fees which level off with just an adjustment for inflation.
Contingencies: If a business fails:
The domain owner has an opportunity to reclaim the domain. The business keeps its platform, content and customers.
The objective of the agreement is to give the leadership team the freedom to run and build as big a business as they can, and to let them leverage the domain brand, without taxing them too heavily upfront. If the business can meet its plan, then there is plenty of room for both the team and the domain owner to benefit from the relationship.”
You’ll want to approach the domain investor prior to securing or announcing VC funding. The more you can pay for the domain, the more a savvy investor will want to charge. You may not be able to buy the domain outright, but you’ll probably be able to work out a deal. For obvious reasons, the first step of a domain owner getting an inbound inquiry is to research who the buyer is and why they want the name, which directly impacts pricing.
You can also use a broker, e.g., Braden Pollock, DomainHoldings.com, DomainAdvisors.com, MediaOptions.com, MorganLinton.com, TobyClements.com, etc. A 3rd party domain broker will understand how to contact the owner and how to negotiate for the name….although it may also signal that you have the budget and sophistication to engage such a broker, which may jack up the price.
Do keep in mind that a domain owner is often in no rush to sell their domain name. High value assets often have high carrying costs, e.g., an expensive yacht or artwork which both need to be maintained and secured. However, a .com domain name costs under $10 per year to maintain. So if you cannot meet a domain owners’ upfront cost, then it is best to get to know them. Understand how much risk and upside they are interested in taking. Let them get to know you and how you are the right person to execute a plan on this brand. That will make it easier to start discussions where the domain owner is willing to take the risk on you as an entrepreneur for the potential of higher reward.
The obvious arrangement we’d suggest is to offer equity as a way to bridge what is likely a large short term price gap. Also, unlike a VC to whom you can’t return their money if your venture fails, with a domain owner you can structure a deal where they get the domain back if you fail. Braden Pollock observed, “We usually maintain ownership of the name but allow admin access until the domain is fully paid for. That way, if payments stop we just “flip the switch” and prevent any further access.” This lowers the domain owner’s risk and can also help you get your deal done.
Because building a real business on a domain is, by far, the most profitable monetization strategy, domain investors are eager to work with entrepreneurs who would consider building a substantive business on their domain. Entrepreneurs, in turn, come one step closer to building a meaningful company if they start on high-value real estate.
Thanks to Gary Millin and Braden Pollock for extensive contributions, and Matt Joyce and Saumil Jariwala for research help. I previously published this in Forbes.