Assigning value to a speculative domain
By admin on Jul 6, 2007 in speculation, valuation, Featured
Not long ago, I wrote about the principles I’m using to guide my early domaining efforts. In that post, I noted that my investment strategy is more like that of Warren Buffett than of a day-trader: buy and hold for the long term.
Yesterday, though, that strategy was tested. I received an offer to buy a speculative domain that I’ve been holding for less than a year. The initial offer would have given me nearly a 100X profit (and would have paid the renewal fees on my portfolio for a long time).
I have to admit, it was a tough decision despite my commitment to the buy and hold strategy. I’ve set up my domaining business as a pure sideline - I pay for all of it with ‘extra’ money and don’t need it to generate any cash. But the temptation to realize a 100X profit was incredibly strong. Only a crazy person would walk away from that, right?
Wrong. I ultimately decided that only a crazy person would flip this domain at this time.
How did I make the decision? This was the hard part - I hadn’t received an offer like this before, so I had no frame of reference or rules to go by. I had no idea how to assign a value to the domain and, therefore, had no meaningful way to analyze the offer (other than “hey, that looks like a bunch of money”).
I thought about it for a bit, and ultimately scratched the following questions on a notepad:
1. Does the logic that made the speculative domain attractive to me when I acquired it still apply?
2. Has anything happened since I acquired the domain that makes it more or less likely to be a valuable generic domain in the future?
3. If the domain becomes a generic, who is the audience?
4. If the domain becomes a generic, how big is the audience?
5. Do I need the cash? (I added this last one because domains are quite illiquid and cash demands change constantly…so I want to evaluate my cash needs whenever I have a potential buyer)
Once I had this framework for the valuation question, the actual decision was simple: No frickin’ way.
The domain is still an incredibly attractive speculative play - even more so today. The potential audience is significant, and I don’t need the cash.
Would I sell at 1000X? That analysis might take a bit more work…. 
Domains for Sale | Jul 6, 2007 | Reply
I was reading an article by Rick Scwartz about selling a domain. He stated also that the value of a sale goes beyond the money you earn. He said that when he sold a domain for 1.2 million that it was actually worth a lot more. He used that money to invest in other domains and stock investments that made him about another million dollars plus made some rather large purchases to improve his lifestyle.
I think another question that should be asked is: Are there larger opportunities that could be seized through the income generated by this sale?
Matt | Jul 6, 2007 | Reply
I agree completely. The opportunity cost of holding on to a domain might outweigh the potential gain you could realize at some point down the road.
It’s really tricky with truly speculative domains, because the valuation is that much more difficult. But the reward could be that much greater, too.
Thanks for the comment.
Al Vin | Jul 6, 2007 | Reply
You definitely made a good list there. From now on, I will be using that too! I, too, had the same dilemma, to sell or to hold but with your checklist, I think making the decision is much easier. Thanks!, Al.
charlie | Jul 6, 2007 | Reply
Matt,
I’m with Rick Schwartz and Black Rock guy. I too just had an offer for a domain I have, and I took the 239% return on my investment. Did I need to sell it? No, it was paying for itself nicely. Did I want to sell it? Yes, but only to continue funding my new vice of domains.
I figured that since I only own 22 domains (I’m just starting and I’m very selective about what I get) that this bounty will help me find another 239%’er, and another, and hopefully a even bigger payday. At the minimum, I should be able to fund a nice stable of keepers.
Matt | Jul 6, 2007 | Reply
Charlie:
Thanks for the personal experience.
I think it shows that, ultimately, the valuation question (and the answer to the ’should I sell?’ question) depends on the individual domain and the particular strategy the domainer is using to grow the stable.
A 239% gain is hard to walk away from.
Thanks again.