A Definitive Guide to Investing in Online Businesses Over Traditional Investments
By: Chaz Nahas
Tags: Online Business, Internet Marketing, Digital Assets, Investing

Let me first begin by introducing the concept of investing in content sites, or any online business for that matter.

What is website investing?

This is the act of acquiring income-generating websites. The goal of this is to essentially have digital real estate. You can make small sets of improvements over a period of time to help the underlying niche website to appreciate in value, and can eventually be sold at a higher return on your initial investment. This is also known as “website flipping”. Over the last 5 or so years, we’ve seen major developments in what was often seen as a relatively new industry.

Why is buying websites a growing trend over traditional investments?

Spoiler alert: ROI

Well firstly, this is a very broad question. If you look at some of the traditional methods today, many of them have little to no risk, meaning very low returns. Now I’m not saying you can’t achieve higher than 10%, but you would have to be a pretty savvy investor to reach those sorts of levels.

With websites, on the other hand, there are many that are producing yields of 20–40% annually, and in some cases even higher.

Traditional investments can often lose value quickly. Their direction is very difficult to predict, even by experts whom you’re often competing with. Let’s make no mistake about that. When you’re comparing returns, websites look favorably on this front.

For example, let’s take a look at stocks. The long-term average P/E of the S&P 500 is 15, whereas, with websites, 35x monthly earnings translate into a P/E of 3.

Now let’s also take a closer look at corporate bonds. Most bonds generally yield about 3–5% right now whereas a website priced at a 35x monthly multiple will typically yield around 34% annually.

Then there’s the real estate market. One of the safer asset classes around and still a fairly attractive proposition. But make no mistake, rental yields are not always guaranteed for various reasons. But in most cases, rental yields can range anywhere between 3–8% annually depending on where you invest.

However as I mentioned already, these are relatively safer bets so I would not discount them completely. Instead, I would look at real estate as a longer-term investment. Buying established websites makes much more sense as a short/medium-term stepping stone towards your longer-term financial goals.

Now if you’re a finance pro (or non-finance) and new to this space, you’ll also probably be thinking ‘Woah, there must be a catch here, there is no way websites can be that undervalued!’.

But wait, let me explain why they are indeed undervalued. Let’s break it down further.

Breaking Down a Website’s ROI

Let’s assume you acquire a content site in the photography niche, generating $1000 a month (on a 6-month rolling average) in commission as an Amazon affiliate for a price of $30,000 (based on a 30x monthly multiple). Now if you did the bare minimum to keep the traffic and earnings steady (barring any potential mishaps along the way), you would eventually realize your return within 2.5x years, and typically yield 40% annually.

Now at this point, you’re probably wondering why a 30x multiple?

Well… the simple answer here is 2-fold. 1) being the risks associated (more on that later), and 2) being the supply and demand.

Given this is a relatively new industry with millions of websites out there today generating a ton of traffic, there is a huge amount of untapped inventory. Once more potential buyers come into space, the multiples will naturally increase.

It’s worth noting that 5 years ago, 30x was the benchmark. But in today’s market, it’s gone up by 3–4 points.

But for the purpose of our photography site example, let’s stick with 30x. Here is where it gets interesting….

How Do You Increase A Website’s ROI?

Let’s say before your photography content site was acquired, during your initial due diligence (more on that below), your traffic analysis had shown the website was relatively healthy, but you also noticed the conversion rate was performing fairly low. Not a problem, you decide to implement a series of conversion rate optimization (CRO) tactics across the site which resulted in a 20% increase in monthly earnings — $1,200 a month.

Based on this uplift, and assuming this stays relatively consistent for the course of the next 6 months, you decide you want to flip (sell) to another buyer, so you get yourself a valuation.

Low and behold (and at the same monthly multiple as when you acquired the site — 30x), your valuation shows $36,000. A $6,000 increase on your initial investment!

This is without including the increased monthly earnings you have been passively pocketing (you cheeky bugger you — only kidding).

But all-in-all, that’s a 20% ROI on your $30k within 6 months!

Not bad right?

Alternatively, if you decided to keep the site and continue earning passively, you’d be happy taking home a 48% yield annually and would make your money back 4 months earlier than projected (2.1x years instead of 2.5x).

Now, this is a fairly simple example, but I think you would by now get the point. A small change to a site has compounding effects when it comes to increasing your website’s ROI.

With traditional investments, as a shareholder of a Fortune 500 company, you have no control over the decision-making process (nor would you want to) for improving the company’s bottom line. The CEO would laugh you out of the AGM meeting (politely obviously).

In our example, you have greater control over your website’s performance.

But this is not without its risks of course. Many people thinking about getting in this industry can sometimes be put off by managing/growing a site themselves. One mistake, and you could negatively impact its performance. However, by a website’s very nature, a change that leads to bad results can easily be reverted. Not as scary as you might think.

Let’s recap:

Websites have a higher return on investment

Small changes lead to big results

Now let’s look at valuation.

Valuation Factors

The surest way to guarantee a solid ROI is to buy a site that is already profitable. But the question is, how much? Luckily in this space, most content sites can usually operate on a 70–95% profit margin. Those margins tend to get lower with eCommerce sites because of overheads such as Cost of Goods sold (CoGs), customer acquisition cost (CAC), and other expenditures (think staffing, etc).

So when it comes to understanding how a website gets a valuation, we have to look at a variety of different factors relative to the type of online business:

Consistency of earnings over time

Traffic diversity

Trends in traffic

Monetization method

Domain value

Spam signals

Growth potential

I go in a lot more depth into each of the above factors in another post — 7 Important Factors That Go Into an Online Business Valuation, check it out.

Risks of Website Investing vs Traditional Investing

As with any investment, websites are definitely not without their risks.

There are some things to take into consideration that you won’t normally find with more traditional investments.

Here are some of the biggest risks:

Google penalties. The big G is constantly making core algorithm updates that can affect many site’s rankings, and in some cases, can result in sites being deindexed completely. This can kill a business overnight. When this happens, getting indexed again takes a lot of time and effort, and once you’re back on, it’s highly likely the site won’t return to its former glories.

The big G is constantly making core algorithm updates that can affect many site’s rankings, and in some cases, can result in sites being deindexed completely. This can kill a business overnight. When this happens, getting indexed again takes a lot of time and effort, and once you’re back on, it’s highly likely the site won’t return to its former glories. It’s a largely unregulated market . Whether it’s over-exaggeration of earnings or just outright fraud, it’s important you protect yourself by having effective due diligence. There are no regulatory bodies to turn to if things go wrong. New marketplaces have cropped up, like ours, that have put in place a thorough due diligence process designed to be objective and help eliminate bad sites before they get listed. The prices you’ll see are a reflection of a site’s risk profile analyzed during it’s evaluation.

. Whether it’s over-exaggeration of earnings or just outright fraud, it’s important you protect yourself by having effective due diligence. There are no regulatory bodies to turn to if things go wrong. New marketplaces have cropped up, like ours, that have put in place a thorough due diligence process designed to be objective and help eliminate bad sites before they get listed. The prices you’ll see are a reflection of a site’s risk profile analyzed during it’s evaluation. Buying and managing websites will require a specific set of skills, so you’ll need to be willing to learn them. Some of these include basic HTML/CSS, search engine optimization, conversion rate optimization, and others. You don’t need to be an expert, but one mistake may cause issues! You either need to have the skills yourself to be confident, or you can hire us to manage the site on your behalf. Learn more here.

The other risk to be wary of is the lifespan of the website, as it will on average be shorter than the lifespan of other traditional instruments such as stocks. We obviously understand Amazon is going to be around in the next 20 years — but we can’t unfortunately make the same assumption about websites. Knowing when to sell is going to be a key factor behind success.

So now that we have covered some of the risks, how do we mitigate them early on before we acquire an established website? Well, that leads me to my next point…

Due Diligence

Like the traditional, every savvy investor will have their own ways to diligently evaluate a potential investment. In our case, this is no different. The most important skill when it comes to investing in digital assets like an established content site or an eCommerce business is due diligence.

I would be doing an injustice to you by not reminding you that while this is a growing industry, it’s still largely unregulated compared to other financial instruments. In other words, it’s pretty much the wild west out there, so if you don’t have a solid due diligence process, it’s pretty likely that you will lose money.

To carry out effective due diligence, you first have to understand the things that make a website valuable and identify any associated risks that come with a site. I go into this in a lot more detail in my Website Investor's Guide To Due Diligence.

But to give you an idea of what’s involved, you’ll need to:

Verify earnings

Verify traffic

Check the content

Check the site’s history since the inception

Evaluate the backlink profile

Look at monetization methods (is it sustainable?)

Identify growth opportunities

Having a solid DD process not only helps you to weed out bad sites, but it also helps you to identify potential opportunities for growth.

Again, for a more detailed guide to doing proper due diligence.

So now that we’ve covered ROI, risks, and due diligence in website investing versus traditional forms, let’s look at what the long-term play is here…

The Long-Term Investment Strategies: Portfolios & Diversification

Traditional investment instruments are, for the most part, long-term strategies.

Now like traditional investors, who will often spread their money across a portfolio of investments (think ETFs, Real Estate Investment Trusts etc) in order to diversify earnings, reduce risk and increase the overall value, so too is the process of building a portfolio of web-based assets.

Why? Let’s go back to my example regarding our content site in the photography niche. I talked about how a bit of CRO could drastically increase and yield far greater returns. But what if you could do that at scale with multiple sites?

I think you get the picture of what’s possible. But for those who want me to explicitly say it, you can expect to achieve a life of absolute financial freedom. I know, so cliché, right? But it’s true.

A heavily diversified portfolio of websites with GROWING traffic and earnings will ultimately lead to not only high returns but an even more attractive valuation — think 4–10x YEARS! Not to mention that your portfolio opens you up to the prospect of selling to even larger buyers — the private equity firms!

We’ve seen PE firms entering this space over the last 4–5 years now, and we don’t see this trend slowing down anytime soon.

Sourcing deals (How to find websites)

Before I dive into how you go about sourcing potential deals, it’s important to set yourself criteria. Not all sites are made equal, so it’s important to establish some key requirements like your budget, the niche, and whether you’re looking for something that is completely hands-off and passive, or something you’re happy to work on and improve.

Once you’ve set yourself criteria, there are a number of ways in which you can source potential deals for established websites.

1. Search engines

This is probably the most obvious method. But there are pros and cons to doing this.

There might be a ton of sites in a particular niche that are fairly large enterprises and might be beyond your budget/criteria. While other site owners might not be interested in selling. You have to go through a long laborious process of researching, shortlisting, and contacting sites/owners.

If you’re not sure about what niche you want to go into or what your budget is, this isn’t exactly the best method for you.

2. Marketplaces

Over the last 5 or so years, we’ve seen marketplaces crop up, including the infamous Flippa and small brokerages. While the former is a relatively known player, you’ll either find a lot of super low-quality sites or sites run by plain scammers. However, I myself have bought a diamond in the rough on there and successfully sold it at 400% ROI, so as long as you have solid due diligence, it’s possible.

The alternative here is our private marketplace, Investors Club. We source all of our deals privately, vet them vigorously, and provide approved buyers with detailed due diligence reports so you don’t have to. We’ll only list sites if we feel we would buy them ourselves. In fact, it's exactly how we started.

3. Brokers

This might be a better method for some, but sometimes brokers are not always on the side of buyers, and most of them don’t provide the kind of service that the likes of Investors Club can provide.

At Investors Club, we provide prospective buyers with a done-for-you Deal Concierge service. This means you tell us what niche you’re after, and we’ll come back to you with 3–5 potentially solid candidates for your next purchase. You can learn more about our Deal Concierge service here.

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Alternatively, if you want to make the leap and look at buying an established business, create a free buyers account at Investors Club here, and check out our listings.