You can read the first parts of this series on domain valuations and the industries journey by clicking on:Part 1 - Domain Industry and Valuations
Part 2 - The domain bubble
So what happened at Point A? Point A represents the time when domain valuations were at their peak. As previously discussed this was largely driven by:
1. Reinvestment of PPC revenue into domains.
2. Large domainers buying up everything in sight.
3. Structured debt entered the market.
4. Investment funds took their first look at domains.
5. Euphoria - domainers believed their own hype.
Of the above reasons a number of them are worth further discussion. Item 1 and 5 in the list really brings the spotlight on domainers. When a marketplace constantly reinvests back into itself and the players in the marketplace believe in ever increasing valuations then you have the characteristics of a bubble.
Two things are happening, there are greater sums of money driving up the price of domains and the second is that the players develop a belief set that justifies those valuations.
For example, whenever a domain sale was made public then inevitably this became the new benchmark for domain valuation. When Marchex purchased their large domain portfolio for 8 years earnings then everyone wanted at least those sort of numbers regardless of the quality of their domains.
Quality is an interesting word in revenue multiple type deals as it encompasses the sustainability of the revenue from a traffic perspective as well as the legal risk that may be associated with the revenue. In such an incredibly volatile market like domains, high domain valuations can often become more of a leap of faith rather than a return on investment.
During the time of Point A I was constantly asked to value domain portfolios where the domain revenue would clearly decline over time. When I stated this to the seller they would laugh at me and ask for a crazy revenue multiple. Each time I would wish them luck and be on my way. After going through the dotcom crash I've learnt to always try and keep a level head while the bubble is rapidly expanding.
Source: Posted on WhizzBangsBlog by Michael Gilmour -- Reprinted with permission -- September 16, 2008