I recently attended a conference hosted by Empire Flippers in Thailand and was asked to recount on a podcast my experience investing in established websites. With all the success stories on the internet today, I felt I needed to be very transparent — My journey was not a get rich quick story.
At age 57 I had realized my corporate career was coming to an end. My earnings after the financial crisis had not returned to the 7 figures I had enjoyed before. Ageism lurks around every corner as you get older, but the real problem was my industry was forever changed.
I look at every imaginable investment in my day job. I’ve built 5 wealth management platforms on 4 continents for some of Wall Street’s biggest banks—Goldman Sachs, Credit Suisse, and Citigroup, among others. I know well all investable asset classes, strategies, and the best managers.
Websites are a new investment class that I began to get interested in.
Why Buy Websites?
Established websites are a new asset class that trade very cheaply. Depending on several factors, you can buy an income-producing site for 20 to 40 times monthly profit. This equates to a monthly yield of 2.5%-5%. So, there must be a reason they are so cheap and there are many.
The primary drivers of these cheap valuations come from 3 sources:
- This is a new and not well understood asset class
- The technology hurdle is viewed by many to be insurmountable
- No institutional money has yet flowed into this asset class and moved prices higher
Having looked at many, many strategies over 3 dozen years of investing, these concerns did not deter me from looking in a methodical manner. My conclusion is that the best deals are always in new and emerging asset classes. Technology is evolving so quickly that almost anything can be outsourced that requires more than basic technological knowledge. I also see institutional interest developing and being embraced by investors.
In short, the time for investing in income producing websites is now.
Buying Our First Website: A Quick Success
The single biggest barrier to getting involved as an investor is there is no organized way to become educated. Website brokers put out content serving their clients (the sellers). Podcasts are almost exclusively dedicated to stories of young guys “crushing it” or “living the dream.”
My issue here is that I have a family and income requirements that far surpass those of the Millennials often interviewed.
I finally decided to use an investment model popular in private equity or venture capital where I would make several smaller investments in the $25,000- $50,000 range. My theory is that most will do ok while a couple could be total busts and a couple could return 5-10X. Overall, this is consistent with my institutional experience over three decades investing in LBO and Venture funds.
As our first choice, my wife and I picked an 8-year-old site selling items for babies with an average order of $100. We paid $17,000 for a site earning $700 per month. I actually chickened out and pulled my deposit at first. Then I shamed myself into manning up and using the $17,000 as a sort of university education in owning an online business.
This was a good test case as I was sure we could not screw up an 8 year old business. The operating experience proved to be exceptional. It was about as easy to run as switching on a computer and sending some emails.
In fact, this experience was so positive, we bought our second site 1 month later.
Buying Our Second Website: Lessons Learned
This site was only 2 years old and earned $1,250 per month. We paid $25,500. But the big deal here is that this was in a huge niche with average orders in the $1000 range. Competition is the biggest name in retailing– both online and off.
With this purchase, we had what I always wanted, a chance to replace my corporate income in some meaningful way if we could scale the business and compete with the big boys. My hubris lead me to believe that with special attention to customers, a single-minded focus on one industry vertical, and an “owner’s mentality,” we could compete.
Was I wrong! Most of 2016 was spent with my wife and I wondering how these folks “crushing it” and only working 2 hours a day could do it. Big Box retailers had the trust that customers seemed to prefer. Returned items were costly when our volumes were so low. Running two sites with little experience meant learning new things that others took for granted.
Worst yet was that my corporate mindset meant I considered every negative event a failure, not a learning experience never to be repeated. My wife was a trooper and spent her day—every day—in the trenches and I could tell our lack of success was taking its toll on her normally super-positive attitude.
My other major mistake was to push forward at breakneck speed expanding and stretching my finances. Draining my reserves created more pressure to succeed, inevitably followed by new “learning” that cost us money.
Our Big Break
Some people read the sports pages for entertainment. In my line of work I have always enjoyed reading prospectuses. Seeing how other businesses run has always fascinated me.
One day I received a prospectus that forever changed my life. I saw a site in one of our exact niches that was doing something entirely different than we were. After some conversations with the broker, we switched strategies and our sales exploded. We saw a bit of a pick-up in less than 2 months, and after 5 months we had our biggest revenue month by a factor of 3.
To support this revenue growth we hired 3 additional customer service personnel. Fortunately, our focus on systems, process, and SOPs allowed us to onboard support—all located remotely. We also added two additional developers to capitalize on this strategy and invest in our future, all funded by our new higher volumes. The result was our monthly net income increased nearly 4-fold.
Website Investing Changed My Life. It Can Change Yours Too.
Truthfully, the next couple months were a blur. My wife was training staff and monitoring operations for potential problems. Remarkably, it seems you have fewer problems with higher volumes when you have more eyes on the business every day. This was not intuitive to me at first, but has remained true. Every morning I would check the prior day’s sales and the trend continued, much to my amazement. Soon, it became very apparent our business would very likely maintain these levels of monthly net profits.
Then it hit me that the online business was now almost as important financially as my corporate monthly income, with what seemed like a fraction of the work and time commitment.
Strangely enough, work has now become something I enjoy more. That’s because I know it will end. As I can clearly see this I seek out the things I truly like about it and tolerate those I disdain. With an endgame in sight, I don’t have the edge I did before. Prior our success, my 37 years of corporate service had embittered me in many small ways. That’s not true any more.
We just finished a trip to Europe where my wife coordinated our team and things went beautifully. As I write this my wife is visiting her sister and has not been home in 5 weeks with no fall off in any measure of our business.
We used our vacation to look for our next potential home to run our business. We’ve always wanted to spend time in Europe and now it seems likely we will.
As I’m cautious by nature, I plan on keeping my day job through at least another school year. I’ll use my free time to read more prospectuses and think strategically about how to grow our business. I’ll also enjoy these last few months of work precisely because I can see the end in sight.
If you’ve read this far, my final message is this:
You’re just one deal away.
This can mean many things to many people, but it’s real and I’m experiencing it every day. I hope you will too.