It’s been almost a full month since my last post; I almost feel the need to attend confession! The last month has been spent working on Flipfilter 2.0, which will be released in January 2011 and is now 80% complete. Many people preach that a startup is always best with two founders and I’m slowly starting to see why, as the tasks tend to mount up and something, somewhere has to give. In this case it was anything non essential to getting a finished product out the door which meant cutting back on blogging, little participation in forums and even my Google Alerts have been demoted to ‘skim-only’ reading.
Whilst focused on the task at hand, it didn’t stop a flurry of ideas for blog posts creeping in; one topic kept coming up, especially after reading books by Brian Tracy, Jack Canfield (who strangely look like they were separated at birth?!), David Schwartz (Magic of Thinking Big) and an essay by Paul Graham (Y Combinator) entitled ‘How to Make Wealth‘.
Have you noticed that some people seem to hit ‘gold’ far quicker off the starting block than others, irrelevant of their business, market or even personal situation? In some cases, ‘luck’ did play a part, with a sense of right place and right time, but generally, these individuals had a different way of thinking and ALWAYS thought seriously big, setting huge goals for themselves. Even if you’re not hell bent on world domination in your online business, I hope you’ll find this interesting to read, as the very topic of aiming for really big goals tends to be an inspirational one; this post is less scientific and more theoretical, exploring strategies to accelerate accumulating wealth through your online business.
Based on several profiles of internet entrepreneurs that became personally wealthy in a relatively short time span, one or more of three factors seemed to be the cause in every case:
(Profile Sources – Mixergy, CNBC and Inc Magazine)
1) Good publicity, a Viral Message or Great Idea
Some businesses managed to amass a huge amount of revenue from starting thanks to good or viral exposure. In some cases, it was the entrepreneur who already had a huge list or following on a blog and managed to turn that following into paying customers for their new venture. In other cases it was an article or blog post that acted as a ‘tipping point’ and sent hoards of traffic to the owner’s site. The most common situation was where an idea was powerful and simple enough to spread by word of mouth.
This is a difficult quantum leap to pull off, unless you already own a huge targeted list (or have access to one), have a skill for coming up with incredible game changing ideas, or you happen to be very persuasive and talented at telling your story. (Apparently chaining yourself to the doors of Tech Crunch until they publish your press release gets you arrested, not famous).
2) Capital Investment
Money attracts more money and whilst it may be short lived, it’s far easier to ‘create’ a rapid success if you have the capital expenditure to accelerate the process.
Picture this, you have a consumer product with mass market appeal. Limited funds mean waiting for visitors to find your website, over reliance on link building and social media and physically taking the product from store to store slowly signing up retailers as you travel across just one state. A substantial capital investment means 100,000s of targeted hits through adwords, paid for placement in multiple supermarket chains, a small sales force and several people working full time on your site’s SEO. Whilst the example is oversimplified it aims to prove the point that having money will inevitably make the job of growing rapidly much easier as in the short term you can buy attention leaving you with the task of converting that attention to paying customers (aka the easy part).
3) Buying or selling their own or other businesses.
This is seldom used alone, but is the only factor used in almost all of the profiles looked at. For example, Groupon became big with a powerful idea and good PR, but became global relatively quickly using that revenue to buy european rival City Deal. Likewise, many of the entrepreneurs did not have a ‘quantum growth’ business on their first attempt, but managed to do so the second or third time around with capital investment from the sale of a previous business, reducing time spent and control lost through raising VC funding.
Many of these profiles focused on larger transactions, with a sale usually being an investment through a majority shareholding with transactions often in excess of $1m, but the lessons can easily be transferred to smaller businesses; ignoring 1) (having a viral idea or incredible exposure) which in my opinion is the most difficult situation to ‘manufacture’, this article explores the idea of repeatedly using the sale of an established site to purchase another more valuable one and hence accelerating you towards your financial goals.
The idea is simple and based on the theory of leverage. A site that earns $1,000 per day, doesn’t require 1,000x more work than one that generates $1 per day, so our focus should be to maximize our time investment by putting it into a project that gives us the highest return, and we can get this project through ‘trading up’ – selling one site to buy another.
Consider the following examples in these two illustration (click to zoom in)
This is massively over simplified, but aims to illustrate a point. The second strategy nets almost double in the same time period with arguably the same resources and amount of work. The only difference is at the end of year one, the owner has ‘traded up’ to another site (Figures assume the current average selling multiple of 8.2x). A third scenario would be where the owner puts the revenue generated from the site A into another site, site C at the end of year one and runs two sites in year two. Overall, he or she would net the same amount as in the second strategy, but by running two sites their workload would have significantly increased, unless they share identical promotional and content requirements.
Choosing fast growth over stable growth and Knowing when to Sell
Knowing when to sell your existing website depends on your personal objectives and goals. I read about some folk that start out in online business and hit a home run on their first attempt. I doubt this is the case with most people though; One of my first attempts made a grand total of £4.97, which I was never allowed to claim after racking up a serious compuserve bill then being banned from going online until I was old enough to have my own credit card…I’m still bitter! In fairness, I realized the idea sucked and gave up on it pretty quickly, but it often takes a few attempts to find your first site that generates a predictable repeat income.
And when that first profitable site comes along, naturally we’re reluctant to sell the ‘goose that’s currently laying the golden egg’, especially if the success is more than you bargained for. This is where having a clear objective comes into play. If you aim to have enough money to simply live a moderately comfortable life without being tied to a 9 -5 job then you’re probably better playing it safe and sticking with your site, especially if you believe in its longevity. If your goal is to become wealthy in a much shorter timeframe than it would take the average man or woman, then you’ll probably need to make a quantum leap at some point and selling your online business at the right time is just a means to that end and a way to accelerate the process. You can have it both; you can do what you enjoy and accelerate the process of becoming wealthy but it seems there will be points when you have to make a choice, and prioritize one over the other.
Unfortunately, there is no real measure of the perfect time to sell. It generally relies on your judgment and a knowledge of your own goals, resources and ability. There are however, a few common factors that will generally be good triggers to consider selling:
- Income has hit a plateau
A consistent stable income is a great thing and a vital component of a long term asset. If you need to make a quantum leap though, recognizing when you’ve hit what seems like a ceiling with that site’s income is often a good time to sell and trade up to something with more potential.
- Tasks to run day to day operations can’t be easily systemized or outsourced
Some online businesses tend to be more labor intensive than others, and have a huge demand for people and time for things like customer support or coding (If you imagine a sliding scale, Adsense sites are on one side, and Web Apps are on the other).
If a business has a good system in place, these tasks can usually be outsourced freeing you up to work on other areas or other projects but trying to systemize an existing business that relies too much on you as the owner (especially in things like blogging) can be more work that it’s worth.
- You’re in a shrinking market
If you’re in a ‘fad’ industry such as fan sites or model specific technology blogs (like iphone3G cases or Justin Bieber Fan Sites for example), you could find that whilst you may do well now, your income will begin to decline once the subject loses popularity (or when Justin Bieber hits puberty – whichever is sooner). Extending the subject area is one way to prolong the lifespan. The problem occurs when it requires a major shift in focus that won you a niche audience in the first place, and the investment may be better placed in a new project.
Selling may not be for you in any of these circumstances. It’s a vast area and a big decision, too big to generalize in the scope of this article, but there seems to be a general consensus of when it’s a good idea to sell and when it’s not.
Why selling an established business works
Firstly, it’s not always a good idea to sell a cash cow, and some of those circumstances are covered below, but many people question the logic in selling a business that’s generating a fairly passive income, asking the question, ‘why not just keep it and start something else?’ Everyone has different reasons but most commonly these are the situations where it seems to make sense:
As an the owner of an online business, you are your most expensive resource (literally, if you live in the US where healthcare isn’t free!) Everyone has 24 hours in a day but some people create businesses that generate millions in a short span by mastering leverage in the use of time, money and people.
As discussed earlier, site A earning ten times more than site B won’t necessarily require ten times more work to run it – this is one of the massive advantages of internet business. Google doesn’t discriminate on how much revenue a site earns, and development work, writing, link building or creating partnerships will take the same amount of time regardless of how much money the site it’s for currently makes. Even on a grander scale where your time is spent managing and not doing these processes, managing an operation that does the promotion for a $10K a day site is no more physically (although a little mentally) demanding than managing the promotion for a $100K a day one; it just involves a different way of thinking, working and most of all the right project or business to apply it to.
b) Fresh Meat = Synergy
Have you ever had that excitement when you come across a new idea and it totally consumes you for a good few weeks? You even find yourself sitting at the dinner table with your spouse or partner, listening, but only on one level because at the back of your mind you’re milling over ideas on just how big this opportunity could be
New ideas gives us enthusiasm, and this translates to energy and creativity which often get stifled when you’ve been working on the same project for a while. Worse still, if you’ve completely lost your initial passion for what you’re doing it can start to feel like a job or a responsibility. Sometimes moving on to a different project is the only way to feel re-engaged and work at your peak again.
c) Know what to do right and have the opportunity to change it
When we start a new project, enter a new niche or even change business format it’s the start of a steep learning curve. We often discover things that in hindsight, we would have done entirely differently, but sometimes it’s just too complex to go back and change. Probably the most common in online business is knowing that deep down, whilst you didn’t pick the wrong niche, you could have picked a more profitable one to invest your time and money into. Starting again, gives us the opportunity to pick and choose the things that we now know are important and right any former wrongs.
But selling an established website isn’t always a good idea…
There are situations when it’s not such a good idea to sell.
a) Selling when there’s still significant value to extract from the business
Whether you build your business from scratch or buy an existing one, your aim is usually to add value, by improving the site internally (design & copy, business model, monetisation strategy) or externally (traffic, revenue, page rank (PR is debatable, but it does technically increase the value)). Selling is essentially about the timing of several factors and one of those is assessing how long it will take to add more value.
If you picture a graph of time against value, it will probably be an exponential curve in the case of a business that is poorly set up; you can improve things like design, monetisation and traffic (which often equates to revenue) fairly quickly at the start, and these will add value. Sooner or later though, the quick fixes will have all been done and what’s left is a long term and more steady task of gradually improving the site’s worth.
Knowing where you are on this curve is crucial in knowing whether or not to sell.
2) Selling when in a depressed market
Sometimes, the market just isn’t ready for what you have to sell. We’re experiencing this with the property market both here in the UK and in US. The marketplace for selling websites is essentially still in its infancy and I believe we’ll experience similar slumps over the next few years as it ages.
As with any developed marketplace, your site should always sell for ‘a price‘ but it may be better to hold onto to your business and wait for better times.
3) You really enjoy what you’re doing, or the site has a connection to you personally
Sometimes just liking what you do is a substantial enough reason to keep doing it. I think anyone that has multiple projects or has worked on many different businesses will always find a mix of ones that they do because it works and makes money, and ones that they do because they’ve put a lot of time into it out of passion.
Seller’s remorse is common with business sales, especially where the seller started it from scratch and sometimes selling what you’ve invested so much time and personal energy into can leave you with a huge hole in your professional life. This goes back to your goals and whether you want to prioritize getting rich quickly, or earning a living doing what you enjoy.
I hope this has been food for thought. It would be great to hear from you if you have direct experience in repeatedly trading up, or aspirations to. Likewise, if you think I’ve overlooked anything, left something crucial out, or should give up on philosophizing and return to analyzing numbers please let me know.