Domain Valuations - Beauty is in the Eye of the Beholder
Since my last post on the value of progolfer.com I’ve received a number of very perceptive comments that have provoked me to write this article.
In the previous article I explored the notion that price and valuation are two completely different things and that as domain investors we need to gain an appreciation for the difference. I sited the example that related to progolfer.com that a value placed by a domainer would be very different to an up and coming golfing company. This also concurs with the valuations that I received that varied between $5K and $500K via the valutaion survey for progolfer.com. It really depends upon your eye and whether you see the beauty in it.
Just think for a minute about the implications of that last statement. If I want to raise debt against progolfer.com is the $5K or the $500K valuation used? At the moment companies such as Domain Capital are using the Moniker valuation method. But is Moniker just another “eye” that may fall in love with a particular name? What is the sound basis of the valuation?
A question needs to be asked which really revolves around what are domain loans actually secured against? One of the fantastic things about the Domain Capital business model is they are completely hedged on multiple fronts so please don’t think that I’m taking a swipe against them. My impression of Domain Capital is that it is run by some really smart guys who understand finance and risk backwards. In fact, I’d love their input on the topic of valuation.
The whole concept of using domains as security or as an investment option for private equity is really interesting. Other than “solid” revenue lines generated by PPC traffic how can capital value domains be used as security given the widely different perceptions in valuation.
So are the investments that are currently being made de-risked to a massive extent by investors? For example, let’s imagine that I had an investor come to me and say that they were willing to buy into progolfer.com for $5K would I accept it? No I wouldn’t. How about $50K? Still the answer would be no. Would $200K be enough to sway me? I think that we are getting there 
This is where it gets really interesting. The only way that a deal will get made is if my perception of value and also that of the investor overlap at some point. If I said I wanted $250K the investor may say, “No way!” but at $150K we may reach an accommodation. Just before all of you investors out there get excited these are all hypothetical numbers.
This means that for every domain there is a maximum value that an investor will pay to invest in that domain and that this value largely depends upon whether they believe in the spin about the domain at that point in time. This is a very different valuation from what the end natural owner of the domain would pay.
For example, for progolfer.com a golf company may pay $500K for the domain, an investor $100K (ie. they believe 20% of the spin) and a domainer $5000 because it was valued on PPC revenue.
This means that there is a HUGE business opportunity that values domain names and puts as much science into their value as possible. This would include things such as length of domain, is it a .com etc but also items such as market size, economic factors, competitive pressures etc. It would need to be a complete SWAT analysis of the industry that the domain catered for.
Let’s imagine that this extensive, methodical process took days per domain to put together (this is a LOT longer then current valuation methods) then the result would be that valuations would be eminently more bankable. What this would mean is that there would be potential justification for progolfer.com being valued at $500K rather than, “just because I think it is”.
If I said to you that I could take one of your domains, research the market etc and put a valuation on it that would mean that investors would no longer discount the risk by 80% then I’m sure you would say, “I’m in!” The question would then move to what this would cost. Rather than dealing with the revenue side of a domain you would suddenly be working on the capital valuation side which is an order of magnitude bigger! Everything sounds good to me so far
You’ve got to ask then why isn’t anyone doing this and taking domain valuations to the next level? I personally believe because it requires a different analytical skill set and it’s just plain hard work. Huge returns but hard work. Compare this against the ease in which PPC income or the current sales are conducted and you will understand my conclusion.
This brings me to the point of my experiment with progolfer.com. I’m at the point of either building a mini-site, selling email addresses off etc or conducting a serious analysis of the golfing industry to put together a paper on my domain. I must admit it that this is one of the more interesting journeys that I’ve had to date and I’ll keep you apprised of the progress forward. In the meantime it looks like I have some work to do!
Source: Posted on WhizzBangsBlog by Michael Gilmour — Reprinted with permission — April 16, 2008