The Dangers of Optimism -or- Don’t Develop

A constant temptation for domainers is to develop one or more of their domains into a business.     Domaining  is hard, tedious, repetitive, and frequently mind-numbing.   Building a business seems a lot more fun.   It is creative, you have something to show to your friends and family, and there is the potential for high returns if you are successful.  But the temptation to develop can be a very expensive and dangerous trap.

We look at start-ups raising millions of dollars and selling for perhaps billions of dollars.  We think, “We are in the Internet industry; We have great domains”.   We also think, “if I develop my domain name it will be worth more than leaving it undeveloped.”

While it might seem like a natural progression to buy a domain and then to build it out, launching an online business is entirely different than domaining.

The attraction of a valuable domain name  is that it has a unique quality to it. But once you try to build a business on that domain name, you become one more start up business competing against hundreds of other more established and better funded competitors. Having a strong domain name may give you an edge but it is unlikely to be a sufficient edge to allow you to compete successfully against the better established businesses in the same space.   A panelist at one of the New York TRAFFIC conferences said it very well. He said that you can have a killer domain name but as soon as you start to develop it, you turn that killer domain name into a mediocre business.

I’ve seen too many successful domain owners take the money that they made from domaining and lose it all trying to build an online business.  Sometimes they would acquire the” perfect” domain name and would pay end-user prices to do so. They would sink much of the profit that they made from domaining into this purchase and into funding the development costs for the new business.   To raise cash to fund the business they would steadily sell off their domain portfolio. Eventually the new business would fail and they would be left with no business, no domain portfolio, and no cash to show for all their efforts, even though for a while they had been successful and made good profits as domainers.

It has happened to domainers I’ve become friends with.  They had a successful domain business, but lost it because of misguided optimism about starting up a new business.

I have fallen for the temptation to develop myself.  Over ten years ago, I acquired my hometown domain, Annapolis.com, my home state domain, Maryland.com, and the domain for the top Maryland resort vacation destination, OceanCity.com.  I thought an online travel guide would be a perfect online niche, as travelers use the Internet heavily and a website would be more accessible to travelers than a printed destination guide and wouldn’t have the associated printing and distribution costs.

The start-up costs were much higher than I expected.  It took a huge amount of time and attention, and distracted me from the domain business.  Fortunately the business stabilized and I now rely on my team to run the business without needing to be involved that much myself.  Ten years of effort later, we are generating significant revenues from these sites but while we continue to grow the businesses , the competition from big players is more intense than ever and the sites haven’t yet generated the level of profits that would justify the effort put into them.

Even big players with substantial resources have been tripped up when they’ve moved into launching new businesses.  GoodNews.com, a daily deal site launched by Kevin Ham’s Reinvent was shuttered.  Vancouver.com was also launched by Reinvent, and while still online does not seem to be actively updated.  Sahar Sarid’s Recall Media put substantial resources into the Bido.com auction platform and the Assista answer search engine.  While Bido.com still survives under new ownership these ventures were not profitable.   Rick Latona recently closed down his auction site after a considerable investment.  Andy Miller and Mike “Zappy” Zapolin who scored some of the highest profile domain name deals including beer.com, diamond.com and computer.com, started Internet Real Estate Group to build businesses on top domains such as Phone.com and Safety.com but have found profitability elusive.

Many domainers, besides myself, have tried their hand at geo-development.  Successful domainers such as Page Howe, Shaun Pilfold, Rob Montgomery, Ken Hansen, Warren Royal, Elliot Silver,  Kevin Ham with Vancouver.com, and others have tried geo-development.  While many of the sites are still active and generating revenue, they have shifted their focus elsewhere after the results were underwhelming.

The conclusion is not that all businesses started by domainers are doomed to fail.  Some of these businesses that were not successful may be paving the way for much bigger future successes.  Starting a new business in inherently risky.  Sometimes it takes many failures before hitting on  a success that more than compensates for the previous losses.

There are successes.  Warren Royal’s Bobbleheads.com may be the best example of a domainer successfully launching an online business that sprung from his domaining business.  Warren, I believe, has devoted himself fully to the Bobbleheads business, including making several trips to China to visit factories.  Elliot’s DogWalker.com site is profitable and growing.  Scott Day’s Digimedia has developed FantasyFootball.com and Jerky.com among others.

Many domainers have been successful with small scale development by adding content to sites, attracting visitors, and generating revenue from AdSense.  But this post is not about Made for Adsense (MFA) sites.  This post is about developing businesses that have direct relationships with customers and advertisers.

The skills required for successfully developing a business are very different than those required to be a domainer.   A key skill for the successful domainer is to foresee the future value of a domain name.   The many skills required for a successful entrepreneur include sales, marketing, development, partnership building, management, leadership, and strong organizational ability.

It is very rare that the same person who has the skills to be a successful domainer also has the skills to be a successful entrepreneur.  Sometimes it takes a team.  The Castello Brothers have been so successful with PalmSprings.com and Nashville.com because of the talents each brought to the business, with Michael having a knack for acquiring the domains and David being a fantastic salesperson.

The lessons I’ve learned are:

1.  Development is much harder than it looks;

2.  Having an excellent domain name is not enough to turn a bad business idea into a success;

3.  If you are tempted to build a business on a killer domain (for example Shoes.com), pretend that you are building the business on a crappy domain (such as great-shoestore.net).  If you are still excited about the business, and if the business plan still works, then it should work even better launching on a great domain.  But if your business plan depends on the domain name to succeed (“We’ll get top ranking with an exact match domain”, “We’ll get advertisers/investors/publicity/customers because of our domain name”) then  you may want to rethink the business plan.

4.  Success in domaining doesn’t carry over to success in development.  Just because you are good at one doesn’t mean you’ll be good at the other.

5.  Do an honest self-assessment about your skills, talent, and motivation.  Do you have the skills to be a successful entrepreneur?

6.  If you are a successful domainer then you can consider yourself to be very fortunate.  Is it wise to shift your time, attention, energy, and money away from a business where you are successful to risk your good fortune on an unproven new business?

7.  Don’t risk everything on the new business.  If you want to invest some of your profits in launching a new business, but your domaining business will survive even if the new business fails, then that is not a big risk.  But if you put your domaining business at risk to launch the new business, the odds are that will be a mistake.

8.  (from Francois) “Search the best name that will match your great idea, and not the inverse or you will probably fail.”  Or, to put it another way, find a great business idea first and then choose your domain.  Don’t do the opposite and start a new business simply because you acquired a nice domain and want to build it out.