Donuts 2.0: Is .ORG a Sideshow in a Larger Bid to Own the DNS?
A wealthy private equity investor once gave me some good advice. He said that when an investor puts money into your company, they have a problem: you.
You are their problem until they can get their money out. To sell an investor, you have to convince them that you are their least worst problem. Once they invest, always be aware that they see you as a problem first. One way or another they are going to solve that problem by coming for their money. A company called Donuts is a great example.
Donuts raised $100 million in stealth mode in 2011. It then exploded onto the ICANN scene, applying for no less than 307 top-level domains in a 2012 ICANN application round. Donuts likely raised between $200–300 million all in.
Founded by long-time domain industry insiders, including Jon Nevett, Donuts barrelled through the years’ long ICANN application vetting process, eventually emerging and launching hundreds of new top-level domains. But demand wasn’t what the industry expected.
Companies thought that domains would sell themselves. But they didn’t. Demand for new domains between 2014–16 stagnated. Companies resorted to steep discounting — think $1 domains — to try to drive demand. That failed as well, forcing some into bankruptcy and creating vast new spam havens. The total number of “new gTLD” domains has been stuck at under 30 million for the last three years.
The total number of “new gTLD” domains has been stuck at under 30 million for the last three years.
The only real options for a company the size of Donuts are private equity or an IPO. Most investors work on five year exit hypothesis. It took eight years for Donuts’ investors to finally find a way out. They pushed out three of the four co-founders. A new CEO — Bruce Jaffe — with M&A experience was installed. Only Jon Nevett, Donuts’ man on the inside at ICANN, remained.
In 2016, ICANN CEO Fadi Chehade joined Boston based Private Equity firm Abry Partners. Two years later, in 2018, Fadi and Erik Brooks, Managing Partner at Abry Partners bought Donuts with money from their flagship fund.
Abry describes the fund as: “…a $2.1 billion private equity fund. We target Flagship fund investments from $50 million to $200 million with flexibility to be larger with participation from our limited partners. Investments are typically controlling positions in which we partner with management to provide industry knowledge, operating expertise, capital market experience and M&A support.”
Abry likely bought Donuts for somewhere in the $600 million range, given the $60 million annual recurring revenue (ARR) it had in April 2018, four months before it sold. So now Abry has a problem. Flipping to another PE firm is possible, but the numbers are big. A 5x on $600 million would be a $3 billion dollar event. The alternative outcome is an IPO. In either case, Donuts needs to show huge growth in a short period of time.
Erik Brooks was at Abry for 20 years. Fadi is still there. It is highly likely that they are looking for a way out of this problem and that the .ORG sale is part of their solution.
Recent mailing list discussions at the nonprofit Internet Society (ISOC) have revealed that their board had been concerned about running .ORG for years. It would have been common knowledge, especially to someone like Fadi, who as ICANN CEO was at the core of these networks.
When the CEO of Public Interest Registry, Brian Cute, inexplicably resigned after seven years in May 2018, things suddenly began to move.
When the CEO of Public Interest Registry, Brian Cute, inexplicably resigned after seven years in May 2018, things suddenly began to move.
On September 5th, 2018, Abry took over Donuts. Coincidentally, Andrew Sullivan — who was known to view .ORG as both a business and a problem for ISOC — took over the CEO role at ISOC the same month, after being hired in June.
Akram Atallah, Fadi’s top lieutenant even before he was ICANN COO, took over as Donuts’ CEO a month later.
Jon Nevett, the last surviving founder of Donuts and the one most politically connected at ICANN, left Donuts just six days later. The departure announcement states:
Jon worked closely with Donuts CEO Akram Atallah during Akram’s ICANN tenure and he looks forward to continued collaboration with Akram at Donuts.
The release also said that Jon would be staying on as a strategic advisor to Donuts. Jon was hired as .ORG CEO in December 2018, less than two months after leaving Donuts. The stage was set. Fadi had a trusted person running both Donuts and .ORG. He also knew .ORG was up for sale.
What happened next is fascinating. Fadi and Erik would have known Abry could not put up enough money to buy .ORG. Their investment hypothesis is tops out in the $200 million range. They needed a separate investment vehicle.
Leveraging his experience at Abry, data from Donuts, and connections to Fadi, Akram and Jon, Erik would have developed a pitch to purchase .ORG. It is not confirmed, but I think it is highly likely that both Fadi and Abry have ownership and/or leadership roles at Ethos. Reliable sources tell me Fadi was seen with Erik talking to staff at the .ORG offices after the sale.
An experienced initial investor like Abry would be a critical gate to bringing on board conservative family firms like Perot, Solamere and Johnson. Solamere and Abry are a 10 minute walk from eachother. Johnson and Perot would have come next, likely with Solamere’s help.
All of this would have happened over the winter of 2019/20. Around the same time, other changes were happening to pave the way for the .ORG sale. Over the course of 2019 4 of 7 Public Interest Registry Board members were replaced. Only one still remains from prior to 2018.
In March, the .ORG Registry Agreement came up for Renewal. Fadi, Jon and Akram would have known this was coming for a long time. Jon was instrumental in designing the new ICANN contracts. The whole push towards contract standardization was Fadi and Akram’s project. By the time the .ORG renewal came up, all Jon had to do was sign on the dotted line for a contract he had helped write while he was at Donuts.
A renegotiated, standardized, presumptive renewal contract with price controls removed would have been a key investor gate to proceed with the .ORG offer. They may even have negotiated the whole deal and then made it conditional on the contract at .ORG being finalized.
Fadi’s suspected registration of EthosCapital.org and the incorporation of Ethos a week later in Delaware both point to this. Two months after the .ORG contract was done, Ethos made the $1.1 billion dollar offer to Internet Society. A remarkable turnaround time.
Here’s where the synergies between Donuts and .ORG come into play. As noted earlier, Abry wants to deliver a Donuts exit for investors from its Flagship fund. If it acquired Donuts for $600 million, it likely wants a minimum $1.8 billion exit. To do that it either needs a buyer with every deep pockets, or an IPO.
But Donuts ARR is likely flat. Domain growth is not increasing. So where is the growth to fuel investor interest going to come from? It’s going to come from three places:
- Cutting costs,
- Buying existing domains, and
- Applying for new domains.
Cost Cutting
Donuts runs its own back-end registry services. It used to outsource them to a company called Rightside (another domain company) before buying Rightside in 2017. Donuts has also worked with Google on their Nomulus platform, an open source solution for running a domain name registry. Both were efforts to reduce the costs of running a domain name registry, which currently range from $1–5 a year per domain.
Huge cost savings could be unlocked by moving .ORG from its current partnership with Afilias, the company that has run .ORG’s technical infrastructure since 2003, to Donuts. Especially if Donuts moves to an open-source platform in partnership with Google. Incidentally, it does make me wonder if this is at least part of the reason that Vint Cerf, who works at Google, is so supportive of the deal.
Such a deal would benefit both Abry and Ethos by lowering costs for Etho’s investors while delivering the best registry services contract on the market outside of .COM to Donut’s (and Abry’s) investors.
Buying Existing Domains
Jon Nevett, PIR CEO, is already on the hunt for new domains. In an interview shortly after the sale he said:
they’ll be looking at other TLDs that have a similar mission to PIR, without naming any, with a view to future takeovers and growth. “We’ll be looking at other mission-based TLDs that are consistent in their mission with .org and that are focussed on doing good on the internet,” said Nevett.
You can almost hear the “mission-driven” renovation plans being hammered together by the many foundering top-level domains seeking exits. A simple B-Corporation certification and an advisory panel is all that Ethos has required of themselves thus far. It would take very little money and time to apply a similar make-up to many struggling domains.
This is great public relations cover. While hoovering up miscellaneous “junk bond” domains and rolling them into a low cost platform, the .ORG team can also position themselves as a benevolent angel cleaning up the domain name space and bringing more domains into the fold. This is important for the third plank of the strategy.
Applying for New Domains
Governments and others at ICANN have been very concerned about how the last new gTLD application round went down. Donuts had a reputation for being rapaciously commercial. In fact pretty much every company that applied for domains went out of their way to annoy nonprofits, governments and others, including Amazon, who fought Brazil and other Amazonian countries tooth and nail for the rights to .AMAZON.
As a result, reputation is going to be a critical success factor for companies competing to win the next round of ICANN applications for new domains, which is coming soon. ICANN hit a sigificant milestone in planning for the next round of domain applications in June of this year. Final rules are expected in the next six months.
If you are planning to play a role in that market, and I expect both Ethos and Abry are, then you need to be getting ready now. Donuts, Fadi and Akram were central players in the last new gTLD round. Akram actually ran the entire new gTLD application process at ICANN.
This play also lines up nicely with the investment timelines at both Abry and Ethos, which will be looking to return cash to investors within the next four to six years.
Why it Matters
From an outside vantage point the .ORG sale looks like a bolt from the blue. A surprise event that is hard to place into a frame of reference. With this article I have tried to provide that framework.
I think Fadi wants return to the domain name market —and its rich bounty of recurring annual revenues — with capital, talent and a plan to manage the regulatory risk he knows is waiting.
It’s nothing less than Donuts 2.0. What .ORG does is provide the social cover and reputational legitimacy to reduce friction for what’s likely to become one of the largest corporate plays the domain name system has ever seen.
This is an audacious and interesting gambit that could totally change the domain name industry. The issue is whether the millions of nonprofits using .ORG want to come along for the ride.
Nonprofits are unlikely to find the notion that their infrastructure is being used as part of a leverage play to dominate an industry appealing.
Nonprofits are unlikely to find the notion that their infrastructure is being used as part of a leveraged play to dominate an industry appealing. The domain name industry is small. Relative to sectors like automotive, pharmaceuticals or online advertising it is a cottage industry.
In comparison, the nonprofits that rely on .ORG are involved in world changing at a global scale. Registrants include the United Nations (www.un.org), World Trade Organization (www.wto.org), the Red Cross (www.icrc.org), and Amnesty International (www.amnesty.org).
To drag these institutions into a quest to capitalize on the continued market liberalization of the domain name system lacks any real understanding of their priorities. If you are working to stop climate change, regulate global trade, fight for the future of humanity, or defend the second amendment, you already have your hands full.
You are simply not interested in taking infrastructure risk. Becoming embroiled in a quixotic quest for investment multiples, even tangentially, would be ludicrous. By delivering the world’s nonprofits into the hands of private equity the Internet Society has done exactly that.
The challenge is that Fadi, Erik, Akram and Jon likely believe they are transforming their industry for the better. They want to make money by doing good, within the constraints of their positions and worldviews. I expect they believe they can set new standards for strong technical operations, community engagement and overall industry responsibility. They see themselves as “white knights”, with .ORG as their noble steed.
I don’t believe that these men came from a position of ill will. These are simply American businessmen with almost no international or nonprofit experience. They simply did not understand the context of their actions. This will make it all the more difficult to dissuade them from their crusade.
At this point, it’s not clear to me how we can reconcile these men’s need to achieve their business plan with the demands of the world’s biggest nonprofits to have no part in it.
I wouldn’t want to be the one holding the world’s nonprofits hostage, no matter how much cash was on offer.
