What value do private investors bring to the community?

For a project I was starting a few months ago, I required a very specific domain name (web address) for the project. It was a combination of two very common words, and as anyone in the web development space knows, these domain names are very rare.

Rare how? Well, you can purchase a new domain name for approximately $20 — $50 for one to two years registration. This means you ‘own’ the domain name for two years, after which you’ll need to renew the registration (for another $20 — $50), or let the domain name lapse, and either go back into the pool of available domain names, or let someone else register it.

Checking out the domain name availability for my next business project ;-)

However, since the explosion of internet based businesses in the early 2000’s, many ‘domain name developers’, or ‘domainers’ have been purchasing these domain names, and holding onto them in the hopes that someone will want the domain name in the future. When someone approaches them to buy a domain name they own, they sell it to them for a much inflated price.

A common comparison of this investor is to a real estate developer. A real estate developer buys properties, develops them, and at some point in the future sells the properties. Domain name investors buy domain names, and sell them at a higher price in the future.

It sounds pretty lucrative because the returns on a single domain name can be massive. But I have a problem with the morals of this kind of business: The only person that benefits from the transaction is the domain name developer.

The domain name investor who sold the domain name gets a (usually) large return. But the domain name purchaser feels ripped off, because had they have purchased the domain name new, it would have been much cheaper. They’ve had to fork out thousands of dollars — often tens of thousands of dollars for really premium domain names — in order to buy their preferred domain name. And the domain name investor does all of this purely for their own profit.

Let’s contrast this to another kind of investor: Mark Cuban. According to Forbes his net worth is $3B, so he’s had a fair few successful investments. He appears on the show Shark Tank and regularly makes investments in many startups and early-stage companies. From the outside, it may look like he’s doing this purely to make a profit, and you’re right, he is. But in doing that, he’s also providing a whole list of other benefits. He’s providing employment to individuals, but most of all, he’s funding these startups to produce a product that 99% of the time benefits the community. Whether it makes life easier for a group of people, or solves a complex problem, the end result is a positive one. Sure, he makes a lot of money out of it, but he’s enabling these positive knock-on results to occur.

Mark Cuban, a very successful investor and entrepreneur

If we go back to the real estate development comparison, the main difference is that a real estate developer gives someone a home. A lot of people can’t afford to buy real estate (especially in Melbourne and Sydney), so they choose to rent the property. The real estate developer makes an income from the rent received, and the occupier has somewhere to live and call home.

Let’s contrast that to a domain name investor. They’re making a profit (and often a large one) and not providing any other benefit to the community. The domain names they sell could have been purchased much cheaper if they didn’t exist. Sure, they pay taxes, but everyone pays tax, so I’m leaving that out of this argument.

The same problem occurs with many other individual private investors (such as full time, stay at home day traders of the financial markets who trade their own accounts only), but I think domain name investors are one of the more obvious examples.

Most of us contribute to the community, and in return receive financial compensation for our efforts. Whether you’re in a full time job managing ordering for a large chain store, or you’re a start up entrepreneur — you’re providing value for the community that they couldn’t otherwise get.

But for others, they’ve come across a very lucrative industry, and it seems they don’t mind if they aren’t contributing in the same way. Next time you’re taking on a new job or project, ask yourself what benefit you are providing to the community in exchange for your financial compensation.