Results From Our First Fund - Domain Magnate

Results From Our First Fund

Michael Bereslavsky                      

Final update: Fund closed after 2.5 years in operation, in oct 2021, with a 203% return on investment and 137% return to investors. Despite initially impressive growth, the final results were moderate due to the effects of google algo updates, and our delays in flipping the higher risk assets. Upon analyzing the results, we’ve adapted our model to focusing on bigger, and lower risk websites, via our group buys.

We are excited to share the results from our first small fund!
We’ve been buying, growing and selling online businesses for over 15 years now and this was the first time we set up a fund with several investors. Previously we used our own capital for all the deals, and occasionally allowed some investors or partners to join.
We acquired the first deal through that fund in January 2019 and some others from February to July 2019. More recently, we’ve also acquired several sites in January to July 2020. This fund was generally targeted higher risk, lower multiple deals, that had higher growth potential and a short term flipping strategy.
In the first 1.5 years of the fund, we’ve acquired 9 businesses with a Total Acquisition Cost of $457K, with the capital invested throughout this period.
For the past 18 months, we have generated $346K in revenue from affiliate sales, digital product sales, and advertising and had $65K in operating expenses.

We’ve sold 4 of the businesses for a combined amount of $494K (after all transaction fees, deal fees, and commissions), and we still have 5 remaining sites with a combined estimated fair market value of $275K.
If the fund were to be liquidated now at a fair market value, the Total Value would be $1,050,604, with a Total Return of 130%.
The fund has been operating for 1.5 years, but on average most assets were held and the capital was invested close to 1 year. Most capital calls happened between June to July 2019, and since then we’ve distributed proceeds from sales immediately.
To most industry outsiders, these returns may look incredible or unrealistic. But for anyone who has bought or managed a website, it is not unusual to get a 100%+ return on a deal. The challenge lies in doing it consistently and repeatedly and that has been our main objective for the past 15+ years in this space.
This fund was also hit substantially by COVID-19 and by the recent drop on Amazon Commissions. Otherwise, the return would have probably been close to double.
But since our SEO efforts were continuously successful overall, it didn’t look as bad as it could’ve been:

We’ve had many of the sites relying on Amazon Associates for revenue. However, in some cases, we were able to substitute it with other affiliate programs and even come out of on top:

Some of the sites didn’t perform very well
One site was sold at break-even: it was acquired for $45.2k and sold at $27.5K. The site has also generated $18K in total monthly profit.
Our lowest deals were two of our smallest acquisitions for $10.1K and for $6.3K. The first one is only generating about $150 in monthly profit now due to some drops in rankings. We are still working on growing it, but at this point we’ve accepted that this is likely to be a loss. For the second one, we’ve combined with another much bigger site we had in the same niche and were able to achieve some benefits. However, on its own, the site was barely breaking even due to high management costs.
A site in the education niche suffered a lot from COVID-19 (as most universities are closed). The site is now recovering and should turn a profit soon:

Most Acquisitions were very profitable
Our most profitable deal was a site we acquired for $51.3K. It has generated $24K in profit and was sold for $142.5K in 9 months — a close to 200% annual return.

Several other deals had similar returns of 100%-200% (if the sites are sold now at fair market price) and others had more modest returns of under 100%.
Our most complex site is a SaaS business. It required us to work with 3 different programmers to maintain, improve, fix issues. However,  it is also one of our most profitable businesses as we are able to grow it steadily.
Our biggest deal for the fund was the sale of two sites for $340K:

Our average deal size in this fund is $50.7K. We found this to be a good range to target initially, however, we are now focusing on bigger deals as they tend to be much more profitable.

We’ve learned some valuable lessons

  • We’ve only used the proceeds from revenue to reinvest in growing all the businesses in the fund. This was how we planned it originally, but in retrospect we would’ve been able to grow some sites a lot more and generate higher revenue and returns had we invested more in aggressive growth where possible.
  • Buying bigger sites is more profitable (duh!), while buying small sites is not worth the effort and time and it’s not practical to manage effectively. A business generating $20K per month doesn’t require 10x the expenses, team and effort to manage a $2K per month business. In reality it’s more like 2-3x.
  • Our deal focused approach is working well. We’re continuing to improve our private deal flow and review hundreds of deals so we can pick the best ones.
  • Quick access to capital and an efficient buying process are essential! We’ve missed some good opportunities because it took time to execute a capital call or get approvals for some deals.
  • We need to diversify more (duh!) across revenue sources, traffic sources and types of businesses. While still staying within our areas of expertise.
  • We have some of the smartest people on our team and that makes all the difference and helps us generate the highest returns in the industry! So we’ll continue investing in growing our team.
  • We need more capital and more investors, as our deal flow exceeds our current available funds, and since we focus on having a fast acquisition process, we need to be ready up front, in order to efficiently do great quick deals.

Update – Nov 1, 2020

We’ve tallied up the recent data to provide this intermediate update, and the overall return increased to 134.77%. We’ve acquired 3 more websites for this fund since, and it now has 8 properties (or 9, as some are combined), and we were able to grow most of the websites revenue, except two, which had some drops in rankings. However, the overall profit and portfolio growth increased. The investors also decided to reinvest a lot of profits back for future acquisitions and we are now looking several more bigger deals for this fund.
A a small family fund, this is closed to new participants, however, we are establishing more funds and opportunities for new investors currently as well.

Final Update – Fund1 Closed in Oct 2021

We’ve officially closed our first fund in Oct 2021, after finalizing the Q3 2021 reports, after about 2.5 years of operation. Af the time of closing most websites were sold, while several smaller websites were transferred directly to investors. Those were mostly passive, affiliate sites that required limited maintenance. Below are the final calculations of how it performed. 

Notes and explanations of the final results

  • We’ve spent a total of $553K in acquisition costs and generated over $1.1M in profit, representing a 103% return on capital. So, in 2.5 years we’ve more than doubled the initial investment.
  • We’ve had a total of 12 websites in the fund. With another one being rejected in inspection period, due to lower revenues, so it wasn’t counted. Two acquisitions included 2 websites each, so we had a total of 10 acquisition deals here. We’ve learned it was too much and now we aim to have only 1-3 websites per fund or GroupBuy.
  • The structure with investors was the following: DM put 10% of the equity in deals and received 50% of profit generated. The return for investors was 137%, so they made a moderate profit of 37% in 2.5 years, or about 15% annually.
  • As you may notice, the initial performance was a lot better than the final results, the main reason was due to focusing on high risk assets, and the negative impact of Google algo updates. The fund’s performance could’ve been far better had we managed to sell our assets much faster.
  • We (Domain Magnate) actually didn’t make much profit, despite seemingly having a rather high return on our 10% of acquisition costs investment, due to our high internal costs of maintaining the portfolio, and our team. Our arrangement with investors here was that we would just bill external costs on the fund (such as paying for content and links), while the cost of our team, who were involved in operating the websites, was largely covered from our profits.

Lessons Learned from Fund1

Buying multiple small websites is not very profitable.

  • The main lesson we’ve learned here is that operating a portfolio of small websites is not profitable, due proportionally higher costs and higher risks, despite better opportunities in acquiring small deals. Even though we were able to score many amazing deals, priced far below market value, and grow many of them further.
  • The high risk of Google updates, which often hit these type of smaller sites a lot harder than the bigger, more established ones.
  • Relatively high cost of maintenance, the cost of operating a $50K website is not 1/10 of the cost of operating a $500K website, but rather about 1/2 to 1/3 from our experience, which makes is far more profitable to acquire and grow bigger websites.
  • Operating a portfolio of small websites can be very profitable if they are flipped/resold very quickly. Unfortunately, we failed to do quick deals, and we found is rather time consuming and complicated to sell multiple higher risk websites effectively. However, as our initial results show, had we managed to sell sites quickly, after 6-12 months, our profits would have been quite outstanding, likely achieving a 3x return in a year.
  • The risk of google update hits grows nearly exponentially for small, high risk websites, if they are kept for a longer period. As the Buddha said 2.5 millenia ago: “everything that rises, passes away”. This holds true not only for thoughts, feelings and impressions of the world, but also smaller content websites!

Holding higher quality websites, over a longer period produces far better results!

  • Our highest profits in fund1 were generated from higher quality websites, since they successfully navigated multiple google algo updates and had a continuous, steady growth
  • Based on these fundings we’ve changed our focus to acquiring higher quality, lower risk assets, at reasonable market prices, and growing them over a medium-long term, (2-5 years), which is reflected in our newest offerings to investors via groupbuys.
  • As we intend to hold these websites for a longer period, the main profit comes from growth, rather than from buying low and selling high. While we avoid overpaying, we are now less focused on getting lower prices, instead choosing to pay market values. Since most of our deals are direct, we still typically manage to get the deals at 15%-25% or higher discount, compared to buying from a marketplace or a broker.
  • We’ve seen this from our fund2 as well, where the total invested capital was $265K, and we acquired 2 websites in feb 2021. As of Jul 2022, they have a current combined value of around $550K. Here we chose to reinvest nearly all the revenues into further growth, and that strategy worked well.