This is a follow up to our previous post about maximising returns while reducing risks. Let’s call it part 2 of our “Having cake and eating it” series.
Just like reducing risk while maximising returns may seem a pipedream, reducing costs, increasing results, and diversifying at the same time can seem equally unreal.
In actual fact, it’s all part of the same thesis. Achieving the latter will lead to the former.
In that post, I mentioned how diversification was the answer to getting great gains without taking on too much risk.
While in many asset classes diversification can lead to a dilution of gains, that’s not necessarily the case with websites, since you’re buying them based on their profits.
Two websites making $5,000 per month each will cost the same as one website making $10,000 per month (but will have less risk of capital).
Where the real issue comes into play is at scale.
What happens if you want to buy ten sites?
This is where the diversification starts to look very handsome, but the maximizing returns trails off.
Simply put, if you run ten sites, you either spread yourself so thin that you can’t possibly get the best results, or you hire people to run the sites for you, and dilute your gains further.
For smaller sites, this isn’t even viable.
When I mentioned in the last post that I’d need to explain the intricacies of diversification further, that’s exactly where we are now.
There ARE in fact ways to do this right, so that you can maximise returns and minimize risk, and diversification IS the answer.
Let’s look deeper.
Bigger Sites Come With More Expenses Baked In
Smaller sites (<$200k in valuation) are usually run by a solopreneur. As such, many of them are running the sites 100% themselves.
Things like keyword research, uploading content, onpage SEO, and general growth strategy are often done by the seller themselves.
This means they don’t show up in the P&L, or at least aren’t considered as an expense in the valuation. Owners don’t pay themselves a salary with sites of this size.
Sometimes, you even see sellers trying to spread fixed costs among their entire portfolio. For example, a software license that costs $75 per month that they use on 4 sites. Many sellers will attribute $18.75 as the expense, instead of $75. Obviously this is wrong, as a new buyer can’t possibly get the license for $18.75.
These are all things you can push back on and negotiate, but the point is that there are many expenses not part of the P+L.
When taking over a site and running it yourself, this isn’t a problem. You’re not going to incur any additional expenses yourself, the valuation is therefore fair, and you’re getting the same ROI that you expect.
The Problem Of Hiring With Lower Cost Sites
What happens when you’re running multiple sites and want to hire somebody to do this work for you? Or even if you’re just running ONE site and want to hire someone to do it for you.
The more you outsource, the more it eats into your profits. Buying a couple of sites making a total of $10,000 per month and want to hire someone full time to run them? Suddenly your ROI is not looking much more appealing than the stock market, or real estate.
You have a lot more upside with websites, but you may struggle to achieve those results. The title of this post is not just about reducing costs, but improving results too.
Our main rule is to buy sites that don’t necessarily need to grow in order to make a good return, but we do still want to work on growing them in a stable way, which means hiring talented team members to work on them.
So what do we do?
Buy bigger sites
Sites that cost $500,000 and above will usually have more expenses included in their P&L. Maybe there’s a content editor, a project manager, or even salaried writers. If you buy the right sites, your expenses may even go down.
Or maybe there aren’t so many expenses, but because the sites have much more cash flow, you can afford to hire salaried staff and still receive an ROI in the 25-30% range.
We’ve seen sites valued at $900,000 that would only take a few hours per week to run. You still need to know what you’re doing, but as a site scales in size, it doesn’t necessarily scale in workload.
This not only reduces costs, but allows you to put team members in place to increase your results too.
We also saw a site valued at $5,000,000 that came with a full $40,000 per month team included in the expenses. A new buyer would not have to worry about hiring. While this site was sold at a higher multiple than lower valued sites, the overall expected returns were also higher.
Economies of scale are beautiful with content sites.
What’s more, we established in this post that larger sites don’t necessarily have less room to grow. In fact, someone pointed out in the comments of another post, that larger sites also have more survivability:
So we know that when we go larger, we have more diversity, more ability to hire without jeopardizing base returns, more stability, and not necessarily less room to grow.
And when your base returns are so high, you don’t necessarily need to grow anyway.
The only issue then, is for those of you who don’t have a vast sum of cash to put towards a portfolio of six figure websites.
How To Achieve All This Without Investing Six To Seven Figures
Let’s say you only have $50k to invest. What are your options?
- Buy one $50k site, grow it as much as possible, sell it, then buy two sites or more with the proceeds. Rinse and repeat.
- Buy one $50k site, grow it, and keep as much of the revenue as possible to use to reinvest in a second site. Rinse and repeat.
- Buy 2-3 smaller sites and do all the work yourself, then move on to step 1 or 2.
- Invest in a holding company.
It may be obvious by now which one of these I prefer, but everyone is different so let’s briefly look at the considerations for each of the above.
Buy One Site And Grow It
For points 1 and 2, the initial strategy is the same. You put your $50k into the biggest site you can buy, and then proceed to grow it. You’ll need to work with someone like us or work on the site yourself, because hiring a full timer isn’t feasible with this kind of cash flow.
Over time though, you can grow the site. Let’s say after one year you’ve doubled the site in size. At this point, you can either sell it for $100k, and buy two more $50k sites and rinse and repeat, or you can hold it, and throughout that year save as much of the cashflow as possible, and buy another site with it.
Both options work, though neither is the best way to do it in our opinion.
While the first option is predicated on successfully growing the site, the second option causes a conflict between wanting to invest in growing your and wanting to keep as much profit as possible. You have to start to get clever with your calculations and determining the best use of cash (another future post I’ll write).
Either way, both options also leave you relatively exposed while building our the portfolio. What if your first site loses value or dies before you’ve bought a second one? There’s very little diversification at this stage.
Buy A Handful Of Smaller Sites
The third option, buying a few smaller sites, gives you more diversification. As we discussed earlier though, it spreads you too thin and forces you to buy tiny sites that have either not been around for very long (more risk), have something wrong with them (more risk), or have limited scope to grow (less upside).
It can work if you are a tinkerer or are an expert at rapidly growing small sites, but for most people, it’s not really viable.
Do you see where I’m going with this?
Best Option: Invest In A Holding Company
The fourth option, is clearly the best. Even if you don’t invest in Onfolio, you should still consider what other players in the space are doing.
Holding companies are diversified, better equipped to grow sites, and can significantly lower risk.
In the digital asset space, the winners will not be the ones who are best at SEO or who can grow a site the most. Nor will they be the ones who have the most sizzle in their marketing.
Instead, the winners will be the ones who can think and act the most strategically, while leveraging their funds the best.