In this episode of the Website Investing podcast, Richard speaks with Michael Bereslavsky from Domain Magnate (Richard was on the most recent episode of his podcast) about the performance of their first fund and news on the second one.
In this part 1, free subscribers get the first ~30 minutes of the conversation; paying subscribers also get part 2 in their RSS feed. As is typical, part 2 elicits more insights as we get deeper into the conversation.
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Part 1 Show Notes
About Domain Magnate
How They Started
Domain Magnate has been buying and growing sites for 15 years now, and only started accepting investors one and a half years ago. They were previously self-funded, but they decided to let investors in because they couldn’t purchase bigger sites in the market with their own capital.
Starting with a Family Fund
They started out with only one investor, and after good results, this investor invited his family members to invest, leading to the creation of Domain Magnate’s first fund: a family fund. This fund is currently set up as an LLC and has 4 members---all from the same family. The fund has grown exponentially and had 9 websites in its portfolio at one point, having been purchased at a cost of $457,000. Since then, they have sold 4 of these sites, and the remaining 5 sites have an estimated value of $275,000. Profits and asset value currently stand at over a million dollars.
Setting up as an LLC is also the easiest way to set up a fund, and also how smaller funds under one or two million are set up as well.
Other Funds in the Works
Domain Magnate is currently setting up two other funds, with the first planned to be a family fund like the one they have now. The second one is going to be a bigger and “proper” fund that will take in various investors, with a capital target of around $3.7 million and their deals to reach around 10 to 12 in number.
In order to actually get in the second fund, an investor would have to be accredited according to Domain Magnate’s standards and must invest a minimum of $120,000. There is an investment target because of the high costs of setting up a fund, including legal and organizational costs and compliance requirements, all of which could reach up to $150,000. Moreover, there is a minimum required investment because it would be very difficult communicating with so many different investors, and to make sure that the investors are serious and understand the industry.
This bigger second fund will have a term of 5 years, and will not take in any more investors after its initial raise. In fact, contrary to other funds in the industry, once this fund acquires businesses, they will look to sell them after once they’ve reached their peak, and thereafter distribute the profits to its investors right away after the sale. They will also distribute dividends regularly on a quarterly basis after around half a year. This setup will go on until the end of its 5-year term, and after this, Domain Magnate could possibly set up another similar fund.
Moreover, they will pay out at around 15-20%, return capital, and return 50% of any upside. These are definitely attractive to investors.
Having a Dedicated Team Onboard
To be able to manage the fund and offer these attractive terms of investment, Domain Magnate has a team of 20 people, with half of them involved in finding and reviewing deals in order to get the best deal. Domain Magnate does work with some agencies for small aspects like buying links, but a large part of the management and operations are done in-house, which helps them lower costs and maintain high-quality work.
The planned “proper” fund will be set up in a way that the income obtained and profits from sales will be distributed immediately to the investors, and will not be put back into the fund for further investments or purchases of new sites. Though other funds would do this to have more flexibility in terms of capital and investments, Michael and Domain Magnate are happier with having a very simple setup and strategy, considering that it is difficult to manage too many businesses. They believe that it is better to focus on 10-12 businesses for the whole 5-year term.
The Buying and Selling Process
Once the fund acquires a business, they assess its risks and potential and also look into how to improve the site overall through SEO optimization. Based on these, they will then plan out that specific business’ timeline to gauge how long they will hold on to the site, and when they will look to sell it in the future.
There will definitely be some sites that will have losses or will barely break even among the 10 planned deals they have. Domain Magnate estimates that around 1 or 2 of those 10 deals will end up losing money, based on their prior experience in the industry, and especially considering COVID and the Amazon commission change. Usually, it’s the smaller deals that are the problematic ones, according to Michael. Considering this, it can then become challenging to liquidate and is a large reason why they don’t prefer to acquire too many businesses within that 5-year span.
Episode 15 Part 2
In part 2 of this conversation we discuss:
How to structure funds / SPVs in terms of liquidating web assets
How domain brokers generate more value than website brokers
Whether it’s possible to have a fund with non-accredited investors
If funds should niche down and what that means in terms of risk profile
Richard’s index fund approach to website investing he wants to see happen
Part 2 is for paying subscribers, you can access by hitting the button below.
Enjoyed this episode or have any questions? You can leave a comment at the bottom of the web version of this post.
Richard Patey (Host) & Avi Silverberg (Producer)