Can’t Afford to Buy Your Ideal Domain? Here’s What You Can Do About It
After days of heated debate with your co-founder, you’ve finally settle on the perfect name for your startup. You go to check if the .com is available and, lo and behold, the domain is taken and being parked at Go Daddy. To add insult to injury, Go Daddy won’t even tell you who the seller is unless you fork over $75 for one of their “certified representatives” to fetch the information for you.
Every day, entrepreneurs with new ideas are discovering that the domains they’d like to build business on have already been registered, most likely by a domain speculator. Since nearly every business these days needs an internet presence, good domains are very valuable properties. Just like physical properties, domains are not fungible. Sex.com is tremendously more valuable ($13 million dollars more valuable, in fact) than xes.com, despite having the same letters. While domains only cost $5 – $10 to register, savvy professional domainers regularly flip them for five to seven figures. Domainers who got in early on the game and scored valuable short dictionary word domains (color.com, disco.com) can flip for millions.
As a broke startup founder, you probably can’t afford to purchase a domain for more than a few thousand dollars. Even if you’re funded, you’d be wise to play the domain acquisition game right to not waste cash. This has lead to the proliferation of intentional misspellings (Flickr, Tumblr) and creative use of international top level domains (Frid.ge, GeneralAssemb.ly). Unfortunately, competition for domains has also led many startups to choose wacky and unwieldy names that make their companies hard to remember. Before you make this mistake for your startup, get familiar with practices you may be able to use to acquire domains with terms acceptable to you. To get you the scoop on what’s worked for the industry, we talked to a number of experienced domain buyers, sellers, and brokers about how they handled their deals. Here’s the advice we distilled:
Understand the Value of Your Domain
Domain appraisal is a tricky business. Quantitative methods are based on SEO characteristics and historic sale prices while qualitative ones consider upcoming business and product trends. Kevin Ohashi, an entrepreneur and long time domainer, develops algorithms for appraisal competitions. His best algorithims hover around 44% accuracy, while the best ones in competition reach only about 68% accuracy. The long tail is very hard to predict.
Given this, the best way to think about your desired domain is the business impact of the brand value and whether you could possibly work with alternatives. With all the startup competition in the consumer web space, companies with short, easily memorable names like Path or Color have an advantage in standing out amidst the noise. That said, if you’re inventive enough to create your own brandable identity like Yahoo or Zynga, this path could be ideal since you’d own the keyword, but you’ll face challenges early on in trying to get your average consumers to remember just who they hell you are. Finally, if a number of brandable names could work for you, this can improve your negotiating power. If you desperately need a specific domain, you may be out of luck when it comes to price flexibility.
If you need a domain name in order to test a product and aren’t sure yet whether that product will be successful, consider whether social media might be a reasonable alternative to a brand name domain. Rob Holmes, a cybersecurity expert turned domain broker, has been working with domains since the mid 90s and has represented many high profile clients in his career. In the past, when SEO was king, his clients would regularly pay six figures or more to acquire domains. These days, social media can deliver a superior ROI and many of them have discovered that their $50,000 budget is often better spent on a Facebook and Twitter campaign than on domain acquisition. These days, the domains Rob buys for his clients sell for substantially lower prices.
One final tip: do not be tempted to lowball a domain seller. Domains, like physical property, are valuable. Domainers get emails nearly every day offering joke amounts of money for a valuable domain. Give a reasonable first offer or you’ll risk undermining your own credibility.
Consider Alternative Deals such as Leasing and Buying With Equity
The original owner of Mint.com was Hite Capital, an east cost hedge fund. When raising their Series A round, the startup negotiated an equity deal with the fund to acquire the domain for stock as an alternative to paying six figures cash up front. The hedge fund reportedly received between 1-2% equity, which totaled “a couple million dollars” when Mint sold to Intuit for $170 million.
Equity deals happen surprisingly often with startups, especially because they give the entrepreneur the option for a low upfront cash outlay while preserving seller upside in the increasingly heated acquisition market. One domain broker we spoke to had brokered alternative deals for some of the hottest startups in the Valley. Each deal is individually negotiated, a process which can take months, but one of the more common financing agreements he’s structured involve the startup paying some portion of a fair price up front (usually 1/3 or 1/2) and getting three years to build out their business. At the end of three years, the domain owner can opt to get 0.1-1% of the company’s equity or buy back the domain for $1 if the business fails.
Another interesting deal structure he’s brokered is the 99-year lease model. In this arrangement, the value of a domain is paid out to the owner in what is effectively a lifetime annuity (ex: $4000 a year). Should the business fail, the seller simply gets the domain back and retains all accrued earnings from the lease.
For this article, we ran a survey of founders to see how open you guys are about these alternative models. While 73% of you said you’d much prefer to buy outright, 76% of you said you would consider a leasing arrangement if an outright buy wasn’t an option. 58% said you would consider renting monthly at an average max rate of $220 a month or $2460 a year.
Should you be interested in such deals, we highly recommend speaking to an experienced domain broker. If you’re a venture-backed startup, email us for introductions.
Profile Your Seller
The domain investor crowd is quite diverse. You’ve got everyone from your stay-at-home mom looking to make a few extra bucks on the side to hugely profitable domain investment firms that manage over 500 million domains. In between are professional full-time domain speculators who manage anywhere from a few thousand to a few hundred thousand domains.
The first thing domain brokers do after collecting client requirements is dig up information on the seller. To conduct a strategic negotiation, you need to understand what type of seller you’re dealing with, how savvy they are, and what sort of return they’re looking for. About 10-15% of domains have a legitimate business built on top of them, so you’ll have to compensate the owner for having to rebrand their company after you buy their domain.
One unique way to research a seller, recommended to us by an experienced broker, is to make an offer on another domain in their portfolio, not the actual one you’re looking to buy. This allows you to gauge the range in which a seller is hoping to sell a certain type of domain. When you can’t agree on a price, ask to see what other domains they have in their portfolio.
If you’re hoping a seller will be open to leasing or selling for equity, be mindful that one characteristic that unifies domain sellers is that they like things simple. Most aren’t willing to deviate outside of the standard practice of selling outright, especially since alternative deals can mean months of negotiation between parties. Large companies like Oversee have the resources to monetize their domain portfolios and generally consider leasing to be leaving money on the table. To monetize unsold inventory, Oversee builds out quality content and makes money through SEO and advertisements. This process generally requires a high degree of industry knowledge, solid SEO skills, and website development expertise. Additionally, content development takes about 6-9 months to start generating revenue. Given this, individual domainers without content development capability might be your best targets for a leasing deal.
The sentiment may be changing, though. Nick Hoffmann, COO of Auzzy, a domain marketplace, has considered implementing a lease-to-buy model for his company. Adam Strong, an experienced domain investor and broker, has brokered several leasing deals for entrepreneurs. Even Oversee might be interested in working with you if you sell them the Mint.com story.
Founder’s Block would like to thank the many contributors to this story, including: