- Board management with outstanding track record investing their personal equity in the domain industry
- Spheres of activity embrace undervalued and fast-growing domain markets in Europe, India and China
- Generally fast-growing market with rising prices as institutional investors are increasing their participation
- High returns on investment through revenues in advertising and other monetization models
- A clear vision and a proven revenue model
- Actual Estimated compound annual rate of return: 25 to 40 percent
„Domains are the real estate of the internet.“
Kevin Ham, international top-domainer
Purpose of Domain Names
Though people today seem familiar with domains and most can recite at least twenty of them from memory, Internet users often know very little about a domain name’s actual purpose, its functionality, or how domains are organized in the Web. One of domain’s most important features is that it translates a name meaningful to humans into the numeric identifiers used by computers, enabling users to locate and address domains easily.
An analogy often used to explain the domain name system is that it serves as a “phone book” for the Internet, translating human-friendly computer host names into IP addresses (and vice versa). For instance, “www.example.com” translates to IP address 220.127.116.11. When the World Wide Web was founded in 1991, only a handful of people had the foresight to predict the great importance of domain names. Shortly after the WWW’s initiation, these visionaries started to register meaningful generic names as domains: “beer.com”, “travel.com”, “business.com”, etc. were all registered in the first months after February 26, 1991, when the World Wide Web was launched. However, for some time the only way to monetize domains was to sell them. During the “dotcom” hype of the early millennium, many domain names sold for as much as one million USD.
Domains and Advertising
After the dotcom hype, the market experienced a cooling-off period until web advertising expanded in 2003/2004. Practically overnight, domains became cash cows through parking. The concept of parking domains was introduced by TrafficZ in 2001. They observed that about 15 percent of all individuals surfing the Internet did not search through Google, Yahoo, or other search engines; instead, they typed in a descriptive URL like “cars.com”, “lawyers.com”, “sex.com”, etc. TrafficZ arranged for visitors arriving at one of these websites to be presented with a list of sponsored links. Each link lead to websites connected to the searched topic, rewarding the domain owner click-through revenue.
A premium domain name is short, memorable and often contains a single word that describes a product or service in a most efficient way. Premium domain names can draw over 10,000 visitors a day, with click-prices rising to or exceeding ten USD per click. Sellers calculate asking prices based on a domain’s potential revenue.
Domains as Investments
Imagine your ancestors bought or claimed now-valuable real estate properties before these properties acquired their value. This is similar to the present situation on the Web: after twenty years there remain numerous opportunities awaiting exploitation. Premium domain names retain their values as long as their keywords remain in usage. Website traffic is generated by people seeking particular solutions, and the more attractive the solution, the more traffic will be drawn to the site. Also, consider that the ease of online buying means that a prospective buyer will likely search for a certain product or service in general terms rather than look up a specific brand. All domains relevant to a general search will be in high demand and extremely valuable to enterprises seeking new clients.
Its Not Too Late – This is a Good Time for Domains
The battle for Internet traffic has become increasingly more intense, and advertising budgets continue to skyrocket. More recently, businesses have begun spending growing amounts for search engine optimization (SEO) to drive traffic to their sites. This new mode of advertising is advancing worldwide via the vast expansion of country-level top domain names (ccTLDs). For example, India’s English-speaking population is the second largest in the world; the country’s exploding markets are without doubt among the most promising ones worldwide, which is, of course, also true for their domain name market.
Another reason that domains are timely stems from the power of imagination: seemingly out of nowhere, someone paid one million dollars for a domain. A psychological dam was broken and soon other, larger transactions occurred. The same will be true for many top-level domains (TLDs) that have not yet appreciated; it is far more likely to pay one million dollars for a Chinese domain today than it was in 2003. Once a breakthrough is achieved, it is very likely to propel the whole market forward.
One more example: in domain marketing as in real estate, there are numerous ways of turning property into a source of capital. With experience and expertise, the right tools and the right people, individuals and companies can certainly excel in the industry. A domain that generates 100 USD a year might be sold for 500 USD, but with the application of appropriate SEO techniques the very same domain can be adapted to achieve a 1,000 USD profit instead. This is but one example illustrating what opportunities are still to be found in the domain market.
The Domains We Like
DDF has found that the best domains names are the so-called generic ones: given an environment of rising advertising costs and intensifying contests for traffic among bidders in the diverse markets, the right generic name constitutes a valuable asset that allows the offerer to avoid expensive advertising. A domain name like jewelers.co.uk (a generic name owned by the DDF) naturally attracts all online clients interested in jewelery from or in the U.K. — a good catch, since each user directly navigating to the site provides advertising revenue to the fund. This development will be further reinforced in the future by new technologies designed to more efficiently match online advertising with the needs of users. These technologies will create quality results for individuals who are looking for products by searching directly through their browser’s address bar or through search engines.
Other solid investments are, apart from simply great names, very short domain names: in the .com TLD, no domain containing only three letters can be acquired for less than 4,000 USD; in other markets however, short names may still be available for registration. We believe that, within short time, these domains will turn into profitable investments for many other TLDs as well.
A Scalable Business
Our business requires very little capital expenditure. Domains do not incur costs apart from a renewal fee of ten to 30 USD per year, a fact that enables the DDF to generate profits from its parking activities even at a low level of capitalization. The business model is also easily scalable since the online market, by its very nature, will continually produce new opportunities to generate profits. At any time, valuable domains can be acquired for the fund’s portfolio.
A Fund is the Right Way to Invest
The DDF provides a real win-win situation for participants: in order to buy and successfully monetize domains, one needs the right partners to park, buy, sell and register domain names. Unlike investing in stocks or bonds, dealing in domains constitutes a full time job that requires technical skills and proficiency in IT, linguistics, SEO and SEM. For most individuals, many great domains are way too expensive to acquire. Our fund however gives everybody the chance to take a share in the profitable and future-proof business of domain marketing. The DDF is there for everyone’s benefit: our investors will profit from our professional team’s expertise and we, the managers, will in turn be able to enhance our performance results since access to greater capital gives us the opportunity to optimize our portfolio. Additionally, fund investors gain instant worldwide diversification in the domain market, something much harder to achieve with individual purchases.
Other Domain Portfolios
You might ask why are there no other funds for domains? There are indeed other funds, highly capitalized and very successful; they are, however, closed to the public. The big names in the industry are: Demand Media, NameMedia, Oversee, and Domain Invest. Together they have raised more than one billion USD in investment for their domain businesses. Google and Yahoo owe 10 percent of their revenues to these domain owners. Many other large online corporations hold great portfolios of domain names as well; DDF however is the first and only fund open to both individuals and institutional investors.
The Future of Domains
Trading in domains has always been promising. This is more than ever the case today, as a rapidly growing number of people and companies move their businesses onto the Web. The popularity of these businesses increasingly depends on the amount of traffic they manage to draw to their sites. Companies are willing to pay huge sums for traffic and online advertising– it’s no wonder that domain names have become valuable assets.
A Still-Growing Market
Along with direct navigation, online advertising and online commerce, the Internet itself is still growing at strong pace. According to a Nielsen study, North America shows an Internet usage penetration of 74 percent; there will not be much growth expected for the years to come. Europe, on the contrary, shows a comparably meager market penetration of 48 percent with still much room to grow. Looking at emerging markets such as India or Africa, we find an entirely encouraging situation: Africa’s number of Internet users is growing at an incredible rate of 70 percent per year, but the penetration of Internet usage has not yet risen above 5.6 percent. Even Asia has reached a penetration of 18 percent only recently, with usage numbers growing at more than 20 percent per year. These numbers, together with the rate of general economic growth in emerging countries like China, India, and Africa (they have many millions of future English-speaking users and new industries just starting to move online ) foreshadows considerable change in the Web’s landscape and a large-scale transformation of the market situation on the whole and the domain names market in particular.
Direct navigation is one of the key arguments for the acquisition of costly domain names and a key factor adding value to them. As already mentioned above, direct navigation denotes the act of entering the name of a specific product or service in the web address field rather than searching for it through a search engine; examples are “weather.com” for weather news and “jewelers.com” for jewelry shopping. Direct navigation has withstood the test of time. It provides generally good outcomes and avoids the increasingly complicated results users are forced to endure when using search engines. Direct search traffic grew 36 percent annually from 2002 to 2006 (Goldman Sachs study) and continues growing strongly today. Those of us who might not have considered using direct navigation up until now may become zealous direct navigators in the future.
An Inefficient Market
Yet another important argument for buying domains: the domain market is an inefficient one, hence huge price differences might occur depending on whether a domain is transferred via an auction or instead by a deal in which an individual or group holds special interest in a particular domain name. The auction of a domain like “trainings.com” (a domain owned by DDF) attracts a rather professional audience composed mainly of people from the domain industry; the price reached will probably reflect the current market situation to the same degree as that of domain name whose value is commonly agreed upon by investors and traders. An auction will very likely offer many domains suitable as investments – it provides the participants with a great variety of names from which to choose. The sheer number of buying opportunities will probably prevent any one name from surpassing an unrealistic price level. However, there is a chance that a domain will attract companies that find a particular name perfectly descriptive and therefore highly valuable for their businesses. This might be the case with “trainings.com” with respect to the leading enterprises in the training industry. Such a domain might sell for thrice, five or even ten times as much as it would in a regular auction. Strategic buying coupled with a growing number of professional investors participating in the market has caused median transaction prices to rise 110 percent between 2005 and 2009, according to a study by Goldman Sachs. Here is a list of some of the most prominent domain deals that have been closed in the recent past:
The DDF´s appraisal methodology
All domain names of the domain developers fund (DDF) are appraised every last day of the month in order to supply the value of the domains to the administrator for the monthly NAV.
This is the current methodology of appraising domains:
When a domain is purchased it is immediately appraised using Estibot.com, the returned value will be used as the base appraisal and we will use its % of value of the purchased domain, the so called discount factor. For the NAV the Estibot value of the domain is now multiplied with the initial discount and this is the appraised value of the domain in our database.
Example: The Fund buys a domain at 1000 USD, the initial Appraisal by Estibot is 10.000 USD, the discount factor is therefore 90%. When the appraised value of the domain climbs to 11.000 USD, the appraised value now is therefore 1.100 USD. If the appraised value is 9.000 USD, the value for the NAV will then be 900 USD.
High value domains
All domains with a purchase price of more than 10.000 USD are additionally appraised by Sedo or Moniker, the 2 leading companies in this field. Should the appraised value by Sedo or Moniker be higher then the current value +10% the management reserves the right not to follow the evaluation and to raise the value by only 10%. The evaluation process by Sedo is also applied to most of the larger developed Websites of the Fund.
Emerging market ccTLDs
The fund owns domains in emerging markets such as Peru, Chile, Nigeria, Pakistan and other similar markets. These domains cannot be appraised by Estibot due to the lack of data from sales in these markets. These domains are therefore appraised by the management, the total appraised value of these domains must not exceed 5% of the total funds volume and had a level of 1,3% in July 2011..
The Fund owns and operates Traffic domains, these domains value is widely based on their revenue. The fund buys such portfolios at a certain multiple, as of July 2011 these ranges are between 15 and 30 months multiples depending on age and quality of the portfolio. For the monthly NAV the portfolios are evaluated at their multiples with a moving average of 3 months to avoid seasonal fluctuations. For example: if we buy a portfolio that generates 1.000 USD/month for 20.000 USD and it generates 1.100 USD in the next 2 month we will use (1.000+1.100+1.100)/3 = 1067 as the new multiple, this means the new portfolio value is 1067 x 20 =21.340. Portfolios become more valuable over time, when the traffic keeps being stable, therefore we reserve the right to increase mutliples over time by 1 step every 3 months up to a maximum of 30 months multiple.