To fully understand why we’re offering preferred shares rather than continuing our other services, or creating a fund, it’s important to know the path we’ve gone down.
A lot of you reading this are attracted to the space because you want above-average returns. Most people arrive with the same thoughts about how to get those returns.
Bear in mind that Onfolio has been further down the path than most, so when we devised our current strategy, it was from a place of experience. We’ve been where you’re trying to go.
Onfolio has evolved considerably since inception in 2018.
The majority of that evolution has been in response to changing environments, new opportunities, and experience.
Experience is one of our major advantages in the space. We just spent 2 years growing a portfolio from a mere handful of sites, to a peak of 40+ websites under management.
When you do that, you learn things.
Sometimes those things are new innovations or efficiencies. Sometimes they’re painful experiences. The key is to make every experience a positive.
When you do that, the net result is that every change you bring to your company should also be positive.
Anyone who has read our blog posts in chronological order will see an evolution of investing philosophy as myself and the company responded to the above changing events and experiences.
A Constant Need For Evolution
Google updates became more brutal, scaling portfolios became trickier, but all the more important.
Amazon finally told its affiliates not to give up their day jobs.
Websites became more expensive, and less passive.
There was (and still is) a pandemic which both grew online business and devastated certain niches.
Throughout all of this, my goal has always remained the same.
To find an answer to the question:
The Penalty For Risk Is Total Loss Of Capital
Online businesses are lucrative, but they’re risky.
That much is fairly well known.
The common solution to this risk is to either learn how to run an online business, or work with somebody who does.
Historically, all you had to do was mitigate risk somewhat, and you’d be home free.
For a while that worked very well. You could buy a reputable website and as long as the seller wasn’t a scammer, and you knew how to add content and do some SEO, you’d be able to reap in huge returns without much effort.
Increasingly it is not that simple.
There are too many factors which are outside of our control, which means even the best businesses and operators can suddenly lose significant traffic and revenue.
Times Are Changing
It is too risky in 2021 to just buy one business and run it, unless you are highly experienced in both the business’ industry, internet marketing in general, and diversifying revenue and traffic.
It’s more prudent to spread your risk across multiple businesses.
This is of course expensive, and dilutes your focus and your returns.
You either have to buy an ensemble of smaller businesses, which require a team that they can’t afford to pay, or you have to spend a significant sum of money buying larger businesses so that you can afford to hire a team to run them.
This is where investment funds come in to play.
When you invest in a fund, and there are some good ones emerging, you can pool your money to buy larger businesses, you can hire a team of experts to operate those businesses, and you can still (probably) get large returns.
We seriously considered a fund as the answer to our question above.
Mitigate risk -> Check
Above average returns -> Check
Liquidity -> Fail.
Low fees -> Fail.
Generally speaking, a fund locks your capital up for 5+ years, and even though you have dividend payouts, your principle is parked until the fund managers realize an exit. You also usually have to make a considerable dollar commitment.
The risk of websites underperforming and killing your returns is reduced, but if you don’t like the way the fund is going, or the operators turn out to not be very good, you can’t get your principal back until they say so.
Additionally, most website funds run for around 5 years, and then sell everything and start again. This leads you down the “flipper” mindset, which leads you to buy low quality businesses in the hopes of flipping them, or forces you to sell winners rather than hold them into perpetuity.
This is fine for many people, but can we do something better?
At this point, preferred shares weren’t on my radar.
There’s more to the decision than just providing an excellent option for investors.
The narrative continues when we look at what different mechanisms would allow us to do as a company.
Thinking In Decades
As a company, Onfolio has a long term vision for what we can achieve within the space. We are thinking in decades.
That vision is perhaps best shared in another article, but the short answer is that we are not a private equity company looking to buy and flip online businesses. Instead, we are building a modern media company, or if we execute well enough, an empire.
To build something significant like this, we couldn’t use a fund model where businesses were held short term and treated as assets to be improved and flipped.
We also believe that talent recruitment is a key part of success in this space, which is another difficulty if we had chosen the fund route. How could we hire talent to run the businesses we buy, and then sell those businesses five years later? Would the talent stay with us or remain with the businesses?
Instead, we looked at the holding company model.
There are a few other holding companies already buying and operating assets in the space, and they more closely resemble the type of company we want to build. Many of them are called “The Berkshire Hathaway of Internet Businesses” (I can think of at least 4 that have been called this).
Personally, I’d rather build the GM of Internet Businesses, but Berkshire Hathaway is an equally acceptable model, and isn’t bad company to be in.
A holding company ticks a lot boxes for us:
Long-term thinking = Check
Talent recruitment easier = Check
Buy and hold model = Check
However, most private holding companies have a problem when it comes to raising money. Not a problem per se, but not something ideal.
With a holding company, when you want to raise additional funds, you typically have to spin up a subsidiary, investors become partners in that subsidiary, and they then only own a share in businesses bought by THAT company. Instead of everyone owning a share of the same pie, you end up with a bunch of separate pies.
Some companies do get around this by raising additional funds into the same holding company each time.
For me though, this both locks investor funds up for an indeterminate time, and locks the company into perpetually re-raising and diluting themselves.
Taking It To The Public
These problems go away when the holding company is public.
To be a true Berkshire Hathaway, you need to be publicly traded (I don’t know why people seem to miss this point).
When you have a stock symbol, raising additional funds is as simple as issuing new shares. The market has already priced them, and they are liquid.
With a public company, talent recruitment is easier.
Dealflow is easier.
Persuading sellers to do a deal is easier.
Raising capital is easier. Many people have told me that in 2021 you don’t need to be public to raise funds, because there is a lot of private funding available.
That is true, but I would still argue that the public capital markets are superior.
All of these things are easier, but still not easy of course.
So Onfolio will go public at some point in 2021 through a direct listing, and that is perhaps also a discussion for another day.
To bring this back full circle, the main point is that suddenly Preferred Shares are a compelling option for raising money.
As an investor, you want liquidity, you want cash flow, and you want reduced risk.
An SEC reporting entity, with fully audited financials, a sound business plan, diverse assets, a solid and rapidly expanding team, and large cash flows from the lucrative nature of online business, can provide an investment opportunity that checks almost all your boxes:
Liquidity = check
Above average yield = check
Reduced risk = check
Transparency = check
The only thing missing is “upside”, which you will be able to experience by buying our common shares, when they’re traded later in the year.
Our preferred shares will pay out 12% annual dividends, paid as 3% per quarter, and once listed on an OTC exchange, will allow investors to sell all or some of their shares in the public markets.
This will give us a strong vehicle for raising funds as we need to, while leading to a cost of capital that is cheaper than if we had to continually dilute ourselves, pay out majority of profits to investors, or take exorbitant fees for managing capital.
The quest for yield is real, and being able to achieve 12% without taking on a large risk, is a very compelling option for investors.
Too many investors in this space lean into the risk in a chase for higher returns, but the penalty for risk is a probable loss of funds.
Personally, as someone who has been living and breathing the space since 2012, who bought his first internet business in 2014, and who has both made and lost six figures in various acquisitions, I would much rather take a fixed 12% return over the coin-flip of chasing 30% and ending up with nothing.
The most important thing about investing is growing your capital at a reasonable rate without taking on unnecessary risk, and as someone who has walked the path, I strongly believe for the average yield-seeker, our preferred shares are one of the best options.
To invest in our preferred shares, or learn more about them, visit this link.