Obviously there are a great multitude of business models that you can apply to your development project. Remember that we are looking at developing one of our domains into a business as part of our portfolio optimisation. The first business model that we will examine is advertising.

In this business model you are trying to ramp your traffic so that it becomes worthwhile for advertisers to spend their money to reach your audience. A couple of things about audience, you can either provide mass numbers or the right people to advertisers. For instance, Whizzbangsblog doesn’t have millions of people visiting it every day but it does have the right people in the domain industry. This is valuable for sponsors.

With your new development you need to choose your approach and go mass volume of advertisers or a select few. If you have a mass of advertisers on your pages, then readers may revolt and advertisers won’t pay the big dollars. Less advertisers will potentially allow you to charge a higher rate and keep the readers onside. It’s a balancing act and it really depends upon your market vertical.

Remember that one person’s advertising can also be another person’s content. This is often the case in hobby publications where the advertising is just as valuable as the articles to the readers.

Unless you have huge volumes of traffic then I would recommend staying clear of selling on a cost per view basis. Likewise, any other performance based advertising (eg. Pay per click) may not be suitable for a business you’re launching out of the gate. A reasonable charge per month is often palatable for advertisers as well as provide some necessary initial cashflow for your venture.

As you write your content what you really want to do is provide value to your sponsors/advertisers. For instance, I use both Escrow.com and Epik and I wouldn’t have a problem recommending them to readers. You need to be careful that you’re not writing advertorial pieces but sharing your own experiences of using their products and services.

You can add a lot of value beyond a banner on a webpage. For instance, earlier this year I conducted a video interview with Jackson Elsegood from Escrow.com about some of the developments that he’s introducing at Escrow.com. Likewise, I will be interviewing Rob Monster from Epik about what he is working on at Epik. If you are looking at adopting this strategy, then the number one issue that you should be focused on is whether this is providing value to readers. There’s no point in conducting an interview that’s merely a sales pitch.

On the flipside of the coin, the ultimate mass volume model is a directory. Once again the biggest challenge for anyone building a directory isn’t the actual building (there’s lots of directory software available) but getting the high volume of traffic to the directory so that advertisers get a return on their investment. As an aside, as a directory grows they can often morph into market vertical or hyper-local search engines…..hence why Google is very interested in this market.

So there are a lot of decisions that need to be made with the advertising business model but they all tend to boil down to providing value in the form of highly qualified traffic. The only way you will keep your traffic is if you are providing reasons (see the previous article) for people to return to your new business. So be really careful in looking after your audience....they have a lot of demands on their time and for them to spend some of it with your new venture is a privilege and should be respected.

In the next article we will look at products, services and how building one of these businesses isn’t actually as hard as you may think.

There never seems to be a shortage of people wanting you to invest in their brilliant idea that is going to take the world by storm. So what do I look for in an investment opportunity?

Just to be clear, I’m not going to invest in a business where the money goes to paying off loans, scooped of the table by founders or pays off some other obligation. The purpose of investment money is to GROW the business so that it is successful…..not clean up messes.

When I invest in a venture, I’m actually investing in a person so I really listen to not just the content of the pitch but whether the person giving it really understands the value proposition. If they can’t articulate the value proposition in about 1 minute, then I become completely disinterested. I’m not deliberately being rude; I just don’t have the time for someone that hasn’t clearly thought about it themselves. It may be a good idea but a potential founder who hasn’t thought about why it is of benefit to customers is not investable.

The second thing I look for is the background of the founder and how they came up with the awesome idea. I’m wanting to hear passion in the voice and why they are going to put everything on the line to get the business up and going. Entrepreneurs tend to have a succeed at any cost mentality that allows them to push through or around any obstacles in their path. If that attitude isn’t there, then you’ve lost me.

Assuming I’m still interested I’ll request a deck. The deck needs to synthesize the entire business in about seven slides. Any more than that and you’ve lost me again…. The slides tend to be:

1.      Summary page – (eg. Including how much you are seeking for what valuation)

2.      What is the problem being solved?

3.      How is the problem going to be solved by the new business?

4.      Market size and how it is going to be reached.

5.      Potential competitors

6.      Financials / Investment

7.      The team

I want to be absolutely convinced that you’ve thought about all of the issues for the new venture. Trust me when I say that breaking the business down into a very short deck will help you really think about all of the issues. Behind each slide there should be a lot of research that you can provide me at a moment’s notice. It’s all a part of the business plan that you will execute once you’ve received the investment capital.

Whatever you do, please be realistic on the investment and valuation. I had a startup business come across my desk the other day that had an insane valuation. They had no revenue or product and were giving up 5% of the business on a $13m valuation. They were essentially value an idea and it really wasn’t that great anyway….

If the business is a going concern then whatever you do, have your financials up to date. I am never going to invest in a business where the founders have a cavalier attitude towards the books. If you are a completely new start-up, then put together a cashflow and make sure you really understand all of the assumptions underpinning the “hockey stick” retained cashflow of the business.

BTW – I’m yet to see a business plan that doesn’t have somewhere in it that it’s a sure thing and going to make millions. I can guarantee you that despite all of the care you’ve taken with the business plan you have still underestimated how much time it will take to get started.

In the cashflow I’m going to get really focused on how big a hole is being dug and also what are the assumptions that drive the cash burn. If I’m still really interested, I’ll probably dig around to see if the cashflow can be adjusted to minimise the level cash burn. From here I’ll calculate the “go/no go” point.

When someone invests in a business there are basically one of three decisions that need to be made at some point in the ventures early stages. If the business is going gangbusters then everyone is happy and congratulations are all around. If the business is going out the backdoor then the decision is simple, close it down.

The third one is a bit harder, if the business is “struggling but may make it” then it requires a LOT more thought…..and this is where businesses typically end up somewhere in the first twelve months. The business is neither thriving or dying but just limping along. These businesses tend to soak up time and sadly, it’s often better to just kill them.

If you are really after a particular investor for their skills and what else they bring to the table, you may want to offer some equity just for them being involved. I’ve done this a number of times over my business career. I’ve dramatically reduced the valuation (to almost nothing) just to get particular individuals into the business. I’ve never regretted having a smaller percentage of a large pie over a big percentage of a small one.

Please let me know any of your thoughts on this topic and if you would like further articles on how to get business investment.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

So many business owners have an incredible desire for profit but so few actually understand why it’s so important or how to attain it. So I’m going to first ask a really dumb question, “So why is profit so important?”

At its core, profit is a measure of a business’s sustainability. If year after year a business is not profitable then it will ultimately fail. Yes, you can keep on raising capital but at some stage investors will stop investing and demand a return on their investment. This will either be in the form of a dividend or a capital increase.

So in terms of a domain portfolio, unless you are earning a profit then your business will fail unless you (ie. the shareholder) keep on funding it through cash injections. This is very different from running short of cash to pay domain renewal fees….more on that later.

So the question needs to be asked, why do domain business often fail? I personally believe that there is a really simple answer to this question. Most domain businesses aren’t businesses at all. They have more of the characteristics of a hobby than a business where the owners are collectors rather than investors.

Just ask yourself the following questions:

1.      Do you have a cashflow?
2.      When was the last time you looked at your balance sheet and profit and loss statements?
3.      Do you have a clearly defined business model for each of your domains?
4.      When was the last time you cleared out non-performing assets?
5.      Does your accountant about how to treat domain names?
6.      Why is tracking both the purchase and the sales price so important for your business?
7.      What is the return on your investment and could you gain a better return elsewhere?
8.      How much do you value your time in your business plan?
9.      When was the last time you seriously considered outsourcing to free up your time?
10.  Do you understand the difference between cash and profit?

Let me tackle point number ten with a little story as it’s often really confusing for people to understand. It’s very easy to have a highly profitable business that doesn’t have any cash....let me show you how.

Imagine a domainer looks at their bank account and sees a whole lot of money has accumulated for the year from their domain parking earnings. They clap their hands with glee and go out and spend it all by purchasing a $30,000 premium domain that they've always wanted to own.

Sadly, even though they’ve spent the $30,000 in cash they actually can’t expense it. In most countries the accounting/tax rules insist that they take this sized item to the asset side of their balance sheet. Here’s the problem, let’s imagine they have $10,000 worth of expenses during the year. This means their profit is revenue less expenses or $30,000 less $10,000 = $20,000.

The government will put its hand out for their fare share of the profit. In the case of Australia, they want 30% or just under $7,000. But hang on! The domainer just spent the $30,000 and don’t have a spare $7,000 lying around.

I hope that this simple example illustrates the traps that many domain investors fall into. They completely confuse both cash and profit. This often compounds if they’re able to defer their taxes and can result in what seems like a double whammy if they continue to make the same mistakes.

So let’s imagine they managed to borrow some money from a friend to cover their taxes and this is secured against the $30,000 domain. If the friend is charging interest on the money then the domainer can expense it during the financial year that it was incurred BUT the capital payments will ultimately need to come out of the following year’s profit (not going to get involved with depreciation here). Yep, it’s starting to feel like a knotted ball of string already!

Suddenly, the ultimate business opportunity arises for their $30,000 domain. A major developer would like to partner with them to develop out the domain on a 50/50 basis. The developer is the ideal fit and they are absolutely convinced they’re going to make a killing. All they have to do is put their domain into the venture and the developer will match it with $30,000 of development.

Hang on a second……they’ve now essentially encumbered the domain twice. Their friend’s $7,000 is secured against the domain and if they default on the payments they won’t be too happy if the domainers gone into a partnership that involves the domain with someone else. At this point in time I’ve seen many domain owners say, "I just won’t default"….and try to slide the second transaction on through.

As time goes by, this scenario gets played out across more partnerships and more domains. Documentation of the transactions becomes scarce and before they know it, the wheels come off the cart and the domain owner is in a complete mess, defaulting on payments and trying to understand how they got into the mess they’re now in.

Fundamentally what it all comes down to is that the domain owner really doesn’t understand business but they love their hobby. They didn’t really know what profit is and how it’s different from cash. This level of naiveté is played out across all of their other business dealings.

Here’s a few sage words of advice, “Have a good account that you talk to regularly. Avoid all deals which involve forming equity partnerships…..they rarely, if ever work out.”

I’ll share more on business thoughts in future blog posts.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

It’s critical that every one of your domains has a business model associated with it so that you can make appropriate decisions about how to best increase their value or realise there value.

So what are the business models that I use?

Traffic domains – these domains are those that receive traffic and are monetised. The key is to extract the maximum value out of the traffic each and every day.

High Value domains – These are more often than not two letter or single word domains – for example, ab.com or vodka.com. These are the “rainbow” domains….in other words, if a large corporate decides to buy one then you’ll get the pot of gold at the end of the rainbow. I would highly recommend that you outsource these domains to a qualified good broker who knows how to create a market.

Stock Items – These domains are often multi-word domains and should all be priced and ready to sell at sub $1,500. You may get more…..which is great but it’s all about moving the stock. The ultimate goal here is to sell around 3% of your domains per year.

Development – You can’t develop everything….you just don’t have the time to impact thousands of domains in a meaningful manner but you do have the time to build a business on a few. My advice would be to build some domains into profitable businesses and then sell them off…..then repeat.

We could refine these categories a bit further but the message should be clear that every domain needs a business model. So take a look at your domains and ask yourself, what business model am I applying to it? In future blogs I'll see if I can unpack the different categories a bit further.

My daughter is in the process of trying to find her first car…always a great experience! She went and looked at one with a friend and instantly fell in love with it. “Dad, this is the best car in the world! I have to have it!”

I openly admit that I know nothing about cars….computers….we’ll that’s another thing. So Sarah returned to the seller’s house to place a deposit on the vehicle but this time she took a friend’s father who happens to be from the automotive industry. It took him ten seconds to glance at the car and say, “No.”

This raises the point, if you want to invest in diamonds don’t ask the butcher for advice, ask the jeweler – it’ll save you a packet! I have domain investors coming to me all the time with a wide variety of deals that they’ve been offered to ask my advice on whether it’s a good deal or not. If you’ve been in the industry as long as I have then you never get surprised by the garbage that some people try to sell at incredible prices.

My 10 rules of buying:

1. Never buy when I feel pressured and take your time to think it over.
2. Good assets are worth the price, you just need to find the good assets.
3. You can ask whatever you want but I’ll pay the price that I’m offering.
4. Telling me over and over again how good something is will not change my mind. If it’s a dog it’s a dog, if it’s not then it’s not.
5. Fancy deals normally end in tears….keep it simple.
6. If it looks too good then it probably is.
7. Go for repeatable income not just look out for the big one offs.
8. Investigate the person selling the asset as much as the deal itself. If they’re right then the majority of the time the deal will be fair.
9. Never do transactions, do deals where everyone wins and both parties will want to do business together into the future.
10. Get good advice and then make up your own mind.

Do you have any rules that you use in your own deals? Please add them in the comments below.