Week 5 ~ Tokenized Website Domains
What’s more valuable, real estate or digital real estate?
The digital age is upon us. It’s been upon us, and will only strengthen with each passing day.
The value of a digital presence had a tremendous light shined on it during 2020 and the stay-at-home economy. During that time (which is still ongoing), eCommerce jumped 44% and reached a penetration rate of 21% — that is, 21% of all retail sales happened digitally. (Source)
It’s time to consider digital versions of all industries, and reconsider interpretations on existing industries. The clearest standouts to me are Website Domains — Digital Real Estate.
Think about the price of the average house in your area. Now think about Ninja Outreach, an influencer marketing site that just sold for $2.5 million in November 2020.
Lines of code and a user base — sold for 9x the average home in America.
The power and feasibility of security tokens in Real Estate was covered during Week 1. It’s time to apply those concepts to the digital world:
Security Tokens x Website Domains — digital Inception.
Value Adds
Website Seller (Token Issuer)
- Reduced Liquidity Premium (or Illiquidity Discount) which will result in an aggregate sales price closer to the Fair Market Value
- Ability to sell off a portion of ownership while maintaining the rest, or sell incrementally over time
- Can structure tokens with fixed distributions — essentially creating a loan backed by the website as collateral (digital real estate collateral)
Prospective Buyers (Token Holders)
- Gain a larger pool of quality websites for investment through fractional ownership
- Greater opportunity to diversify among several website domains rather than deploying all capital into one
- Ability to seamlessly resell website ownership at the Fair Market Value in the future
- Access to proportionate cash flows generated through the website
Partnership Potential: Flippa — Full-Service Domain Marketplace
Flippa is a full-service website marketplace founded in 2009 — so a little over a decade old. I say full-service because not only does it provide a medium for users to buy and sell websites, but it has evolved into a whole advisory platform offering due diligence, valuation, broker, pricing, and financing services.
If any business can integrate security tokens into website domains, it’s Flippa.
Revisiting the Real Estate parallel, ownership of a property’s title entitles someone to the appreciation value and cash flows of said property. Similarly, ownership of a website’s domain simply gives someone the rights to the website’s underlying content. The underlying content and monetization methods are what drive revenues.
The important factors in evaluating a website have to do with quality of the content, quality and consistency of the user base, search engine rankings and optimization (SEO), and lifetime age. As with all assets, some are deemed higher quality than others, and therefore demand a premium valuation.
Below are two examples of live websites for sale on Flippa:
Site A is listed for sale at $850,000 and generates a Net Profit of $37,257 per month.
Sale Multiple: 1.9x
Site B is listed for sale at $5,050 and generates a Net Profit of $338 per month.
Sale Multiple: 1.2x
Site A is listed at a 1.9x Multiple, which means the buyer can expect to recoup the full investment in 1.9 years, whereas Site B is at a 1.2x Multiple, meaning the buyer should recoup the full investment in 1.2 years.
On the surface level, it looks like Site B would bring the buyer to profitability quicker than Site A would. However, the aforementioned factors should be taken into account. Factors like Site A being 5 years old vs. Site B being 1 year old increase the likelihood that Site A will meet its projections relative to Site B. The density of Site A within search engines relative to Site B also anchors the domain’s value, and should not be overlooked. While it’s possible that Site B continues to grow and shine, I bet users would be more comfortable investing $5,050 into Site A rather than Site B.
That’s where security tokens come into play.
Tokenizing the domain of Site A and launching X amount of tokens for sale on the marketplace, rather than simply listing the site as a whole, will bring benefits to both parties.
The potential buyer base will grow exponentially. Let’s be real, most people aren’t in a position to drop $850k on a website even with generous financing terms. $5k though? That’s absolutely feasible for savvy investors looking for assets outside of typical stocks and funds.
The seller will avoid the Liquidity Premium (or Illiquidity Discount, if you prefer. FI-nance vs. fi-NANCE). This is essentially the hidden cost of trying to sell an illiquid asset. If ownership of something is cumbersome to transfer, the burden usually falls on the seller to lower the price and make it worth the buyer’s while. As we mentioned, investors are much more likely to deploy $5k than they are to deploy $850k on a single asset. By fractionalizing shares of the domain, the aggregate sale value will be closer to the Fair Market Value of the asset.
In layman terms, nobody is going to haggle the tokens down from $5k, whereas a single buyer may try to negotiate down from $850k.
Through tokenization, the buyers’ pool gets a significant addition of high-quality assets, and the sellers can be more assured that they are receiving the Fair Market Value of their well-developed assets.
As real estate continues to make waves in the tokenization space, the effects should ripple into the digital world. One day, anybody with a digital wallet will be able to buy shares in a European dropshipping website in the morning, sell them the following week, and put the gains into an up-and-coming social networking platform. All with the click of a button and some due diligence, of course ;).
Part 2 of this edition coming next Wednesday 2/17/21! Continuing on the theme of Digital Real Estate and security token potential within the underlying content.
Disclaimer: This is not financial or investment advice and should not be interpreted as such. Please do your own research on investments and financial decisions before partaking in any ideas or ventures depicted in this publication.
