Why buy a digital asset?
The simple answer: It’s one of the greatest ways to own your future.
What do we mean by that? Investing in a digital asset is an investment in yourself. When you put money into the stock market or invest for a few shares of a local startup, your return is entirely dependent on someone else’s work and determination. If the company whose stock you own has a good quarter, you get to reap the rewards, but if they have bad leadership or make some poor manufacturing or marketing decisions, you suffer the consequences despite never having had the chance to right the ship. When you invest in a digital asset – be it a website, SaaS, or App – the return that you get on that investment is completely determined by your own tenacity. You quite literally own your future as it is your business, you can manage it exactly how you see fit, and you can then sell it whenever you feel the right time has come.
Because of this urge to lean on oneself rather than rise and fall based on somebody else’s work, there is an enormous and growing community of entrepreneurs who are looking to acquire their first digital asset. The mix of what you can buy has changed dramatically over the past few years which makes the process more exciting than ever before. Be it an eCommerce store, a content site, a subscription based SaaS platform, an app, or even an Instagram account, Youtube channel, or Amazon product portfolio, the options are quite limitless and there is something for everyone out there on the market.
We’re always inspired by those who have done it before and one of those entrepreneurs is a serial Flippa user named Stacy Caprio who currently owns a catalog of 4 different digital assets.
“I am forever grateful to Flippa for being the catalyst that helped me transition from being the girl…who felt trapped and chained in her cubicle, to the girl I am now, living in my dream apartment overlooking the bean and Lake Michigan in Chicago.” Stacy Caprio SideHustleNation.com
We see three primary reasons that people move towards an investment in a digital asset: Lower Risk, Established Traction, and Good Returns.
Lower Risk Investment:
You can buy into the digital asset class with a significantly lower entry cost than other asset classes. While there are always opportunities on the market in the multi-million dollar range, there are also stellar opportunities available for just a couple hundred dollars as well.
We don’t all have the funds to flip houses or start a craft brewery and even if we do have those funds, we don’t necessarily want to risk them all on a single investment. It’s important that these lower cost opportunities exist, especially for those who are dipping their feet in for the first time, just trying to understand the industry and see what they can do with an online business.
This is one of the best parts of purchasing a digital asset through Flippa – you get to start off on the right foot. Historically, and still today, most people start a small business from scratch and are tasked with all of the heavy lifting, startup costs, and personal time needed just to get to day one. It can be incredibly tedious to build an eCommerce shop with hundreds of items or to code out a well performing SaaS platform and you won’t be getting paid during those months of hard work.
In purchasing an already up and running online business, be it just 3 months old or 10 years old, you’re purchasing something that is already established and moving forward. You will be acquiring an asset that could already have an established design and phenomenal branding, pages of content, optimized eCommerce operations, deals with international suppliers, part time contractors happy to continue their work with a new owner, and of course, established revenue.
Ask any entrepreneur and they will tell you that finding their first 100 customers is a struggle. Beyond the setup time and costs, it can take several months just to establish enough traction to get revenue flowing. In purchasing an established asset, you have a huge head start in your entrepreneurial journey.
Owning a business is an investment and when it comes to investing, there is only one thing that matters: returns. You aren’t purchasing a website because you think it looks pretty, you are purchasing it because you see the opportunity to own your future and create wealth. Luckily, when you purchase something that is already running well, you are set for a great return.
You should always aim for a 30-40% return on your investment in a digital asset. Compare this to the stock market where the average rate of return is around 10% annually and you realize how undervalued this asset class is right now.
To put this into real terms, imagine that you acquire an online business for $15,000. Let’s say that this business, as is, drives $500/month in net profit ($6,000 year). That is around a 35% return and you’ll have made your money back in less than 2.5 years. And that is just running things status quo. If you purchase an asset where you see a bit of opportunity for growth, something where you can turn some dials, you may be able to recoup your investment even quicker and be making pure profit in no time.
Who are the buyers and sellers of digital assets?
Whenever you’re investing, no matter the industry, it’s important to understand who might be competing against you in the market or who might be there to work with you in the future as you’re looking to sell. You wouldn’t want to walk into an auction at Sotheby’s with zero knowledge of who is sitting in the room bidding against you on a piece of art in the same way that you shouldn’t start bidding on Flippa without understanding who the other potential buyers in the room might be.
While there are plenty of first time buyers, there are also a number of sophisticated investors. It’s important to know that there is an established group of proven investors in the arena as you will want to school up quickly in order to participate. And guess what? That is exactly what you are doing while reading the Flippa blog.
The Boss Generation
What we like to refer to as the “boss generation” are primarily first time buyers looking to move away from their corporate desk and start working for themselves. These are the people like you who have had enough with their manager breathing down their neck and want to invest in themselves and work freely and happily on their own projects.
Ready to Exit
These are sellers, just like you might be one day down the line. Owning a digital asset tends to be a cyclical process, very often moving from buying to operating to exiting to buying something new. There are a number of customers on Flippa who are readying to sell an asset that they feel has grown to the height of their personal potential (we discuss this in our First Time Buyers Due Diligence blog post) and are looking for their next investment.
These are sophisticated buyers looking to buy to aggregate at scale. There are a number of people within the Flippa community who purchase 10, 20, even 50 assets every year, adding them to their portfolio where they can leverage off of each other and optimize at scale. You may not be dreaming of this lifestyle for your own future, but it’s important to understand that you might be bidding against these seasoned investors and take some tips from our First Time Buyers Due Diligence post on how to outshine them when making a bid.
What should I look for?
This is sound advice for any investment: don’t spend more than you feel comfortable spending.
Like with any investment, there is never a guarantee, so it’s important to understand just how much money you’re willing to put into a company before you start searching. Equally important is to realize that while you may be looking for so-called “passive” income, no business is truly passive. You should come into the acquisition knowing that you should have a few extra dollars up your sleeve to reinvest in the asset for marketing expenditures, purchasing inventory, or even hiring on some technical support to overhaul a piece of the backend. Luckily, there is such a broad range of opportunities awaiting you on Flippa that it shouldn’t be hard to find something that fits comfortably within your budget.
Subject Matter Expertise
We’re all good at something. Some of us are good at a number of things. It’s important to seek out an asset where your skills can come into play to increase the value. Remember, this is an investment in yourself. Take a look at the potential opportunities and note what the current owner has done well, has done poorly, or hasn’t even taken advantage of in the least.
If you are a whiz at SEO, you should look for opportunities with content or affiliate sites that haven’t yet optimized their organic search practices. If you’re incredible at sales or consumer retargeting, perhaps you should seek out an eCommerce site that hasn’t yet closed the loop between page views and sales. These opportunities to use your own skills are what every buyer should be looking for, whether purchasing a $250 starter site or a six figure, well established listing.
Buy something that you’re excited about. If you’re going to own your future, you may as well enjoy your future. Be it finance or travel or video games, you should look for something that truly interests you as you’ll be working on this project for quite some time and you don’t want to feel bored with it. On top of this, working within an industry that interests you will help you relate to your customers, putting you in an advantageous position to market and sell your product.
What should I pay?
There is no straight answer to how much someone should pay for a digital asset. When Facebook purchased Instagram for $1 billion back in 2012, most people thought they were crazy. Why would they buy a photo sharing app for that much money? Looking back on that purchase 8 years later, it seems like Instagram should have asked for more.
So, while we can’t tell you exactly what you should pay for an asset, we can give you some guidelines based on what we found when looking at over 50,000 asset transactions Flippa. We’ll quickly examine four common asset types and look at their typical sale value as well as the high end anomalies that can occur on occasion.
We see these sell, on average, at a 1.95x annual profit multiple and have seen them sell for up to a 6x multiple. The reason that a content site, or really any digital asset for that matter, might sell for an extraordinarily high multiple is because the buyer sees a significant weakness in the company that can be fixed rather easily with their skills and then optimized to allow for a speedy return on their investment.
In the wide world of eCommerce, we see sales, on average, of a 1.85x annual profit multiple with a high end at around 4.5x. It’s important to remember that there is a wide variety of eCommerce sites. They can be Amazon FBA stores, Shopify sites, drop shipping companies, print on demand services, or they can own their inventory and be running fulfillment themselves. All of these factors must go into the valuation of any given eCommerce store.
We see these sell, on average, at a 2.7x annual profit multiple and have seen them sell for up to a 4.8x multiple. The reason that a SaaS platform can sell for a higher multiple than both Content sites or eCommerce shops is because they are typically based on a recurring revenue model. Subscription is sexy because it guarantees revenue for an extended period of time.
On top of the standard conditions that might be used to value specific asset types, age plays an important role in the valuation of any digital asset. A business that has been around for several years will earn a higher multiple as they have proven revenue independent of seasonality, they have established operational procedures, and they often have aged content that is ranking in organic search.
This is why starter sites can be such an exciting investment. The value of these sites rests much more in the eye of the beholder. If you see value in what has been created and the opportunity for it to generate income, then it can be a great way to enter the digital economy for minimal investment. You are purchasing these sites based on potential rather than on a profit basis.
There is no shortage of great reasons to purchase a digital asset. Whether you’re looking to invest your money into a low maintenance project that will pay great dividends for years to come or you’re looking to leave the corporate landscape, become your own boss, and work hard to build upon whatever it is that you purchase, the opportunity to own your future is pretty incredible and we’re seeing more and more people excited to get into the mix.