New Era of Domain Investing
Third Chapter: Whales, Builders, and Flippers.
This is another brief article, which, I hope, can help new gTLD domain investors (mainly those who are just starting) to get some unbiased overview of investment opportunities, but also investment traps which one can face when investing in new gTLDs (new domain names, which are domain names created in extensions like .life, world, .online, store, or .xyz). Today I will discuss differences between various investment approaches when it comes to new gTLDs, an particularly we will learn the importance of investment styles. Articles here are shorter extracts from my book “New Era of Domain Investing”, which will be ready around July 2021.
Disclaimer: all ideas here are just my personal opinion. This is not investment advice under any circumstances. My opinions might prove wrong, as, despite the fact that I tried to understand things I describe here the best I could, I might fail in some instances. You must, therefore, do your own full due diligence before making any investment.
Third Chapter: Whales, Builders, and Flippers.
What is the best time to invest in new gTLD domains?
This is, of course, the million-dollar question. Different investors approach this very differently. As per my observation, there are basically 3 main groups of new gTLD domain investors: I will call the first group “Whales” (early investors, usually with a lot of money, usually long term investors), the second group “Flippers”(early or later investors, usually with not much money, short term investors) and a third group “Builders” (early or later investors, with a medium amount of money, by definition long term investors). The following text is only a rough approximation of what is going on, as almost no new gTLD investor belongs purely to one of those groups — some people combine two of those styles, and some try to combine all three. Anyway, here we go:
New gTLD investment style no.1: Whales
People in this group generally have a lot of money to invest. They are either professional domain investors who earned a lot of money in a .com era or simply investors without much of previous experience but with a lot of cash in their hands. Because of a large amount of money they spend, registries, registrars, and other domain investors just love them. Whales are investing usually $50k-100k+, while some of them invested in a range of hundreds of thousands of dollars.
They are in general not afraid to buy premium-priced domains, sometimes the premium renewals for domains they hold are in thousands of dollars, although most typically those renewals can be anywhere between $100 — $1000. As they tend to buy directly from registries, they are able to get various good deals (usually it is 1 larger payment when they purchase domains, and then the registry agrees that it will remove premium pricing from the domain name and renewal will become just a standard renewal — this type of deal is pretty common).
Whales in many instances invested very early, just after first new gTLD extensions went live. Many large purchases were made in the years 2014 and 2015. Particularly when we speak about the .com era “old school” domain investors who decided to invest in new gTLD domain names as well, we can see some very early investments made with confidence, as those investors usually know their stuff well. They also understood that to be the first means to be able to get the best names. They usually hold a few hundreds/few thousands of good names. Of course, when someone holds, let’s say, 1000 names and average renewal per name is $200, a total renewal fee of a portfolio is somewhere around $200 000 (each year). That means this style of investment is suitable only for a very limited amount of domain investors, particularly for those who are well-funded. and not much risk-averse.
Advantages which this style of investing brings:
You can get the best possible names available to private investors in new gTLD space. In the case the value of some new gTLD names will rise significantly in the future, your profit will also rise significantly in the future. Potential profit is very high, but associated risks can also be seen by many investors as high.
The main problem which this style of investing brings: none, or a smaller aftermarket immediately after the investment is made.
One thing is clear. Domain names need time when it comes to their value growth. We all know stories when someone bought fantastic keyword .com domains in let’s say 1997 and sold it in 2017 or later for millions of dollars.
It is clear that if the hero from any such “success story” would try to sell the domain in 1998, he might get some profit, but because the aftermarket for .com domains was just a fraction of what it became years later, the profit would be not comparable to what was achieved with huge patience. Simply said, in most cases, you need to wait for years to sell domains for large profits. This is valid for .com, and this is valid for new gTLD domains as well.
As many of the whales bought in their investments very early, and for large premium renewals, some of them found themselves in a situation when they needed to pay high renewal fees every year, while aftermarket for their domains was still only developing. Thus, in many cases, they got into red numbers. Based on individual luck and investment skills, some whales sustained the pressure successfully and are already profitable with great portfolios ready for the future, while some of them are still in a loss or exited their investments completely.
We can then ask: so why they have invested so early when no aftermarket (or just a small aftermarket) has existed? The answer is, of course, the competition. Domain registrations usually work on a “first-come, first-serve” basis. Good names will not stay unregistered forever, and those investors are smart enough to know it. You can basically get in early and get the best names, or you can wait until aftermarket is fully formed, but then no good names are available anymore to register (maybe only those with very high renewals).
So is the “big guys” investment style profitable?
Honestly, no one knows at the moment. The opportunity to invest in New gTLDs started in 2014, and we are now only in 2020, while still many new gTLD extensions are only yet to come to the internet. It would be illogical to expect that we buy good domains, and we can sell them for multiples of the purchase price just within 1 year or two. But this was the same situation with very early .com as well. In addition, the actual lack of stronger aftermarket for some of the new extensions is further emphasized by a number of new extensions (we have several hundreds of them). The positive thing is that those investors are now holding now some of the best domain names available, the names which can make large sales in the next few years. We have already seen large new gTLD sales like those of home.loans, online.casino or vacation.rentals which are around $500k each, When such sales happen more frequently in future (and in my opinion, we have every reason to believe that), some of those very early investors will suddenly start to be very very profitable
Patience — is it a virtue, or not?
A lot of whales who invested very early and in good quality names with premium renewals are now in a very good position value-wise, but they still need to pay those renewals.
Some whales started to complain after a year or two that new gTLD names are not profitable. Some of them stated publicly that they use profits from their existing .com portfolios to offset losses they have in the new gTLD area. For those people I personally think the whale style of investing is not suitable — they should shift more to the “builder” style, which I describe in the next paragraph, and they should also start thinking more about how to manage those renewals. And this is what is indeed happening now in large part — many investors who did not care about renewals now learned that they need to care.
There is, however, another group of those investors, who invested smartly and have enough funds to maintain their portfolio. Many of them also understand how to park their names or to create some affiliate solutions, and they can offset some renewal costs doing so. I have seen examples when a new gTLD name with a very high renewal fee was parked, and income from that fully offset renewal cost, giving its owner even a tiny profit each year. This is a prime example of fantastic investment — domain name pays for itself, and because of its quality and a large pool of end-user, it is just a matter of time when it will sell for a big profit. I have to admit I do not know if this is a common cause or not — almost no domain investor is willing to share details as of which names and in which particular extensions are suitable for parking income. But this is definitely one way that can be used to make renewal costs more sustainable in case you go for a whale style of investing. People who can do that generally love new gTLDs, as they accumulate high-quality names all the time, make good sales, and will probably do even better in years to go.
New gTLD investment style no. 2: Flippers
Flippers are people, who buy and then try to sell domain names for a profit within a short period of time, ideally within 1 year, prior their first renewal fees are coming. They can be classified into 2 main groups: experienced flippers and newbie flippers. Here we go:
Some of the new gTLD investors — experienced flippers were in early and studied the market since 2014, therefore they are very knowledgeable, can use registration promotions, and are well aware of various domain marketplaces. They can be therefore profitable, as usually they buy names for $50–500 and flip them to other domain investors for $500–5000.
When names are carefully selected, that actually works and is a profitable style of the short term investing. Overall profit for average flipper with few hundreds of domains is not high and it requires a lot of work, but a few thousand dollars/year is a very good income addition for some people in some parts of the world, so it is worth doing for them. Being in profit is possible when we speak about experienced flippers, which are usually domain investors with years of experience.
Another category of flippers are people who are new to domain investing. They tend to buy a lot of names using various promotions. Those names usually are not very high quality, and often they drop their whole portfolio when the first full renewals are coming, as they find themselves without any sale. It again depends on the particular person: there are clever people who learn quickly about various promotions, and selling venues, while there is a large group of people who just register whatever nonsense keyword1keyword2keyword3.gTLD and try to flip this to another domain investor, usually without much success.
Basically, when it comes to new gTLD names, I do not personally think they are the most suitable asset to be used for flipping, or as a short term investment, in 2020 for people without any domain investing experience. Mostly people who really learned a lot can be profitable with new gTLDs and flipping these days, as it requires spending a lot of time learning about this topic. The complexity of new gTLD investments is high, as there are several hundreds of extensions and they differ very much in their prices, renewal fees, TOS, end-user usage, and many other aspects. Therefore it seems to me that a lot of flippers prefer to stay in the .com realm, where rules are established already for years, and once you learn them, you are basically good to go. New gTLDs requires extensive additional learning, plus not everyone is willing to adjust to new times and rules.
Important not only for flippers — the existence of the aftermarket.
Flipping is particularly hard for extensions which just went life: there are many people who buy good names in the brand new extension and try to flip them immediately. This usually does not work, as aftermarket is naturally not present yet. Still, some of those people then complain loudly that it is a new gTLD domain fault — they want to register a new name for $5 and flip it immediately for a large profit. This is, in most cases, unrealistic, although as usual, there are some lucky exceptions from this rule.
New gTLD investment style no. 3: Builders
Builders are domain investors whose aim is to build larger new gTLD self-sustainable domain portfolios, which can be carried into the future without additional external money investments. They believe that new gTLD domains will be accepted more and more in the future among end-users and the general public and that their value will rise in years to come. Their investment horizon is long term, 5–20 years. I am not hiding that I am one of them.
What builders do
If you believe that new domain names will become more used by end-users and more valuable as time goes, your objective is to hold as many good names as possible. This is also what whales do. The difference between whales and builders is financial — while whales can basically buy whatever they like (while some profitability calculations are often present), builders can usually spend just a few hundreds or few thousands of dollars initially, and are trying to build their portfolios from there. As they do not wish to fund their renewals from external sources, they try to make their portfolios self-sustainable and profitable from year one. This means, their yearly sales must offset the yearly renewal cost of their portfolio, and if there is any profit, they are using it either to buy additional names or to renew their existing good names few years into the future. Therefore I am calling such new gTLD domain investors “Builders” — they are patiently building the value in their portfolios.
Of course, when builders are doing a lot of smaller sales and using the money also for their personal needs, this shifts them more towards flippers. Boundaries between those two styles are not solid, there are a lot of domain investors who try to flip their worse names, and to keep their best names in hopes of a larger future sale, which is perfectly logical. But still, if you are a pure builder, you use the profit of the sales to make your new gTLD portfolio larger.
So which investment style should I adopt?
I would say that the builder investment style is the hardest of all styles to execute properly. Being a pure flipper, you will never keep in your hands anything really valuable for the future, but you can instantly enjoy money earned from domains, and buy something nice to you, or to your family. Being a clever builder means constantly re-investing the profits of your sales to your portfolio. It requires a lot of discipline, patience, and a lot of work. And strong confidence, that investment asset you invest into, in this case, new gTLD domain names, have a bright future. Being a smart whale can be the most profitable of all styles, while it can also make you a big complainer if you have not managed your renewal fees correctly from the very start, or picked up not so good names.