Michael Bereslavsky is the founder and CEO of Domain Magnate. He’s been involved in various internet-based businesses since 2004 and quickly graduated from building, promoting, and monetizing websites to buying and selling them. With over a decade of experience, Michael and Domain Magnate has managed 300+ successful deals.
Michael, thank you for doing this interview with me. Although I’ve mentioned you already on some of our earlier articles I can’t believe we haven’t done an interview! Totally my fault, and I hope to amend this failure today.
Let’s just get straight into it!
Q: You are a popular face on Flippa, so I think we don’t need a long introduction, but can you share briefly how you made your first $1000 online?
A: Sure, I started back in 2004-2005 with building an affiliate website about how to make money online, which is what I was I learning about at the time. I wrote articles about different opportunities and monetized them through affiliate links and google ads. I think it took me about 4-5 months to get my first $1K online.
Q: If I am not mistaken, you were first trading domain names, and then made the transition to buying and selling websites. Can you explain how you made that transition? Did you find it beneficial to know more about domain names when you started trading websites?
A: I first started by building websites and then got into domain trading shortly after. There were periods when I was focusing more on domain trading around 2007-2008, when the domaining market was going up rapidly, so there was a lot of opportunity for profits by trading domains. However, around 2008-2009 the trends in domaining reversed, and prices plummeted, so I sold part of my portfolio and focused back on building, growing and buying websites. I found the skills are transferable, however, websites provided more opportunities and higher margins, while the market was still in its infancy.
Q: How long have you been buying and selling? During that time, have you found any patterns that keep repeating over the years? For example trends with multiples, Google updates or any other trends that are making an impact on our industry?
A: It’s been over 15 years in the space for me now. There are several major trends in the industry, including growth, expansion, integration and consolidation, and the other for increasing multiples. Back in 2005-2010, you could have acquired content websites for less than 10 times the monthly earnings, while now it’s around 30-45 times. The market has grown and matured tremendously in the past decade and a half. All the marketplaces and brokerage companies didn’t exist back then, in 2005 all the deals were done via forums or privately.
In the past years the market for content websites has turned from a buyer to a seller market, whereby there are so many more buyers, than sellers, the prices keep rising and the marketplaces are full of low quality websites for sale due to high demand.
The market is also very imbalanced, as most buyers lack the experience and expertise to understand how to measure risks posed by google updates, or amazon associates commission changes and similar risks.
I expect in next few years, as buyers become more experienced and educated, the prices will normalize, with a large gap between lower and higher quality assets. Currently we are seeing low quality, newly built websites often selling for very similar multiples to well established, lower risk content businesses.
Q: Yes, this is the thing that confuses me a lot, and I think it’s an advantage for more experienced investors. How in the world can a 2 year website have the same multiple as a 10 year old website? Actually, let me ask a better question; how do you find deals like that? On your website, you mention you do a lot of deals privately before they reach the marketplace? What’s your secret sauce?
A: The biggest risk to content sites is Google algorithm updates, and there is a lack of understanding among new buyers and investors on how this works. On our side we try to educate our investors and explain the risks with new sites, using aggressive SEO techniques. New buyers often make their choices based on the site’s niche, domain, or design, or operational requirements, without the proper risk analysis.
Over the years we’ve done a lot of deals, so we are known in the industry, we also run a popular podcast, network with business owners, and do outreach to find leads. Part of our team is involved in reviewing and looking for leads of businesses to buy. Here we can leverage our reputation and scale to get a solid private dealflow and that’s been one of our primary objectives and advantages all along. I firmly believe that more than 50% of your success in acquiring an online business is about getting a good deal. A good deal is not necessarily cheaper (although private deals are often below market prices), but it’s about the combination of limited risks, great growth opportunities and solid numbers.
Q: On your website you published that “in the past 16 years you’ve acquired, operated and sold hundreds of websites and online businesses, with consistently high returns.” When you are buying websites, what are the top 3 things you look for?
A: Our diligence focuses on numbers, risks and opportunities, and we iterate upon those 3 when going deeper as we consider a deal further. Initially we review the revenue and traffic numbers and trends, assess main risks and opportunities for quick improvements. In further steps of our due diligence we look further into verifying numbers, analyzing trends and reviewing long term growth potential, and, most of all, looking further into risk analysis. Of all three I believe risk is the main factor to consider, and it’s unfortunately the one that’s most often overlooked or misunderstood.
Q: All right, in my opinion, you struck the nerve here. Let’s talk about risk-reward. When you are buying a website, do you get excited if you see a potential of 10X profits, or if the website has “guaranteed” same returns? (Explain why)
A: For us it often depends on the investor’s or Fund’s objective, since we had investors who wanted to go for massive growth opportunities, and others who preferred lower risks. However, for me personally, and for our upcoming fund, the perfect deals are established businesses, with multiple sources of traffic and revenue, limited risks, and reasonable growth potential.
Additionally, with a fund we take more of a portfolio approach, so out of 5-10 deals we may buy 1 or 2 which are 10x potential and higher risk, but we’d make sure the rest are “safe and steady” deals.
The reason for low risk bias is based on the current market situation and analysis, I talk more about in episode 5 and 8 of our podcast. It’s also contrarian to the common approach among most buyers, who look for unlimited growth in high competition areas, while we prefer steady, boring websites about pets, or knitting and similar evergreen, long term niches.
Q: When you operating from websites about marijuana through technical SAAS websites to women’s health, you must learn a lot about everything on a personal level? Also, would you say that having a great team that can work in any niche is an advantage over other website investors?
A: We are generally niche agnostic, we have some criteria and preferences, but we focus more on the deal parameters, and risks and growth opportunities. We have an experienced management and tech team, and a network of writers, so we can generally cover most topics. As we develop more niche specific expertise, we are also developing more advantages in those spaces by having better affiliate relationships, higher CPA rates, direct advertisers, and more growth opportunities.
Q: As a fund, is that how you try to mitigate risk?
A: Yes, absolutely, we’ll hunt for good deals, acquire solid businesses, with growth and improvement opportunities. Most 6-7 figure online businesses are mismanaged, with many unnecessary expenses, so the fastest and easiest way to increase profit is generally by reducing expenses, that’s what we often focus on first.
Q: After your initial success with brokering and managing websites, what was your next step? Was it then you had an idea to do a private fund?
A: It took me a long time to accept that we need to start accepting investors and work with outside capital to grow further. We’ve only started working with investors in early 2019, after we had to let go several extremely attractive deals, due to not being able to get enough capital in time. We started with only one investor, and then he brought in several more who wanted to join, and it organically evolved into a fund.
Q: Why is investing in a fund a good idea, and what can investors expect? Since the fund is only available to accredited investors with a minimum investment of above $120k, did you want to attract only a certain amount and type of investors?
A: There are several main reasons to invest via a fund, first the diversification, as we plan to acquire 5-10 businesses with the upcoming fund, so that will allow us to build a diverse portfolio to reduce risks associated with focusing on one business only. Secondly, this allows us to target bigger businesses in the range of mid 6 to low 7 figures, where I believe the best deals are currently. This is the ideal range for us, because it’s above the reach of most individual investors and small groups, and also below the target range of larger funds, PE firm and public companies.
The downside of investing via a fund is that investors will not have control over what assets gets acquired, and then and how they get sold, compared to our individual buying services, where investors can review deals and choose what they like and also decide on the timeline for resale.
Q: I see, so you have several different options investors can take? What’s the main difference between “fund” and “buy manage” option? Would you say that the fund is for those who would like to diversify better, and “buy manage” is for investors who are interested in better upside with greater risk attached to it?
A: Good question, and indeed the fund is for longer term passive investors, looking for diversification, while buy-manage is intended for investors looking to own businesses directly, and have more impact on growth, operations and resale decisions, as well as a faster turn around. We find that investors with more experience in online business, who have specific preferences regarding the business they want to own, often go for the buy-manage option. We also had investors who started with one deal via buy-manage, and then gradually built a small private portfolio with our help.
Q: With your first fund you had some success, can you share what lead to that success?
A: With this fund we were mainly targeting content websites in mid 5 figure ranges, with average deal size of about $60K. The fund had a shorter term objective, so the sites acquired posed higher risk, and were acquired at lower multiples. We were able to grow many of the sites and resell at higher amounts.
Q: Is there anything specific you want to share about your latest fund? Official launch is on April 25th, anything else?
A: We invite investors to visit the official fund website on domainmagnatecapital.com for full details. With this fund we are targeting investors who run or operate successful internet businesses, so they understand the industry and the risks involved. This fund is going to be our main focus for some time, and builds upon our prior success, so I’m really excited about launching it and allowing a larger audience of investors to join us!
Q: In your presentation you explained that 65% of profit is shared with investors in quarterly returns. First of all, I highly recommend anyone interested, to watch that entire presentation, but just as a hook to entice people to watch the video, can you further explain how the returns are paid, and how does that look in practice?
We’ll pay quarterly returns and distribute 65% of profits to investors. We’ll also distribute profits from resale of businesses, as soon as they are sold, in the next quarterly payout.
Also, as a disclaimer, I’d like to remind the readers that investment in online businesses carries high risk, and past returns shouldn’t be considered a guarantee of future profits.