I’ve been in tech for a long time, but I have recently started investing in websites as a pure asset class. I’ve done this for several reasons.
- Websites are a great way of diversifying a portfolio
- As an asset class websites are still dramatically undervalued
Most assets deliver anywhere between 7-15% per year depending on how successful the investor is and how much they focus on the investment.
The stock market has historically averaged 7% and bonds have done less.
Real estate, if actively managed, can return on the higher end of that scale due to favorable tax treatment and the benefits of mortgage debt.
I hear a lot about amazing returns in venture capital and private equity, but I don’t have enough cash to get into those investments.
Which brings me to cash flow websites. These are assets that can now be purchased easily and whose returns are extremely attractive relative to the alternatives.
There has been a boom in digital entrepreneurship in the past 10 years as platforms have made it possible to create sizeable businesses online with little startup capital or even expertise required. These platforms include:
There has also been an explosion in the tools available to promote and market these businesses. This has made it possible to scale them immediately and at low cost using tools like:
- Facebook and Google ads
- Pinterest and Instagram Influencer Marketing
- Mailchimp email marketing…and more
The thing is that all this entrepreneurial activity, which is easily measured in the billions of dollars, has not translated into a liquid market for investors in these assets. We have not yet seen the securitization of these millions of online businesses into an easy to consume investment vehicle for the average investor. Not yet.
But these assets are large, extremely profitable, and available for multiples of revenue that would make Warren Buffet salivate. So even if they haven’t been securitized, they are definitely ready for the average investor in the same way that rental properties are ready for the average investor.
Roughly speaking, solid online digital assets can be bought in 2019 for the following multiples of yearly cash flow:
- Ecommerce (inventory): 3.5X >> 28% ROI per year
- Dropshipping: 3X >> 33% ROI per year
- Content (Reviews): 3X >> 33% ROI per year
- Content (Advertising): 2.8X >> 36% ROI per year
These types of businesses, many of them with five or more years of history and profitability, can be bought via several brokerages (see my list at the end of this article)
Most investors have a very hard time finding assets that will throw off 30%+ per year in any asset class, as I said at the outset.
Of course, digital assets depreciate more quickly than physical ones do. But in the same way you need to hire a management company to manage your rental property, website operators can be found who will maintain and even grow your web business for 10-20% of revenue.
Why is it that investors haven’t flooded this market yet?
Part of the answer is that they are beginning to, but not as quickly as you would expect. These types of returns can’t last, of course. But here are some reasons why they might last longer than you’d think:
- Most investors are still not comfortable with the intangibility of website assets, even though they are in many ways more tangible than bonds or other purely financial instruments.
- Websites require operational expertise that most investors do not have and do not have the energy to find.
- There is a lot of information asymmetry when buying a website, and there are many ways to falsify performance. This requires more due diligence than many investors are willing to make.
Each of these obstacles will diminish over time as markets become more liquid and service providers lower the friction to acquiring and maintaining these assets. Of course, those middlemen will also lower real returns, but there is a lot of room for that yet.
In my next post I’ll talk about how I’ve tried to solve for some of these problems in my own case.
In the meantime, here are some places you can shop for cash-flowing websites:
I’ve worked with or used the below:
- Empire Flippers – probably my favorite broker. They do a lot of due diligence up front and guarantee their listings.
- FE International – I’ve had good experience here. They focus primarily on SaaS businesses.
- Dealflow Brokerage – larger deal sizes.
- Shopify Exchange – great for ecommerce sites. There are a lot of sites that have burned bright and then lost their steam because the product they sold got too competitive. One really good thing is that revenues and traffic are all verified by Shopify, which is hard to get elsewhere.
- Flippa – this is like the flea market of website brokers. There’s a lot of schlock and a lot of scams, but every once in awhile you can find a great bargain.
- BizBuySell – not focused on online businesses, but a lot of older sellers put their sites up here which sometimes leads to interesting online/offline opportunities. Note that this site can’t be accessed from outside the US.
I haven’t worked with these, but they have a lot of listings: