Sitting on capital and assessing your investment options? Chances are, if you’re hunting around here, you’ve thought about real estate, bonds or ETFs but you’re still a little bit curious about what online businesses can offer.
Sure, you can get your standard 8-10% (minus those brokerage fees) on an investment fund or eke out double-digit returns on investment property but if you’re keen for a greater yield, then investing in an online business might be just what you’re looking for.
Recent years have shown that this emerging asset class is growing in popularity for the savvy investor. Bear in mind that if you want a greater yield, you will almost certainly incur more risk – but there are a few different ways to mitigate these.
Throughout this article, we’ll explain how many people are capturing returns by investing in online businesses, and we’ll introduce you to some of the ways we’re helping investors take a more passive, and diversified entrance into the space.
What Do We Define As An Online Business?
First things first, let’s take a quick look at what an online business actually looks like. While many first time investors choose to buy an eCommerce or content type of business (attractive because they are scalable and easy to understand), there are several types of online businesses that you can consider, including:
- Advertising. A content-driven model that’s sprinkled with paid advertising messages (e.g. with banner ads or links). This could look like a personal fashion blog monetized through fashion ads advertising J.Crew or Neiman Marcus.
- Affiliate. Another popular model if you’re not looking to sell your own products or services, affiliate websites sell other suppliers’ products and services in exchange for a commission.
- eCommerce. Centered around buying and selling of products or services over the internet. This can be done by directly shipping a product to the buyer or by dropshipping, where storage and shipping are handled by the supplier. It can also include services like freelance platforms Upwork and Fiverr.
- Lead generation. A website used to attract traffic and capture user details which is ultimately converted into leads and sold as a service.
- Software. Typically a software product created by a developer and sold on a subscription basis or by the download e.g. Adobe Creative Suite.
- Software-as-a-service (SaaS). An online business where users pay to access web-based software instead of installing it on their computers. Popular SaaS products include Canva, DocuSign or Hubspot.
- Subscription. Users are charged a fee on a regular basis (e.g. monthly) to access a continuous service or product. Think Dollar Shave Club or an online course.
What Are The Benefits Of Investing In Online Businesses?
Compared to the dot-com boom, the online business market is now much more secure and stable. Rather than speculating on domain names and potential ideas, as was the scene back then, there is now a mountain of online businesses which generate consistent monthly profits and deliver yields for investors.
Here are some of the benefits of investing in an online business:
Potential To Get In Before It’s Widely Understood
Since this is an emerging asset class, with some similarities to the cryptocurrency space, it can be argued that many of these businesses are currently undervalued. Especially when compared to traditional brick and mortar businesses.
Therefore, there’s a great opportunity for people who understand the potential yield for investing in online businesses to generate great returns with an acceptable level of risk.
Passive Income With Low Effort
If you’ve got the right skills and the knowledge needed to pick the right business, buying and running your own online business could be done with little effort required. An already established website can make money with affiliate links or ads and might only need a little bit of tweaking so you are making money while you sleep.
In addition, you can choose a completely passive option, such as our 12% Dividend Preferred Shares.
Quick Return On Investment
Compared to real estate, for example, it’s possible to buy some online businesses by paying 2.5 to 3 times their annual revenue. Buy a business that is growing and it’s likely that the revenue will increase.
Sure it’s possible to achieve double-digit returns with real estate (if you use debt) but with the current average website purchase multiple at around 2.5 x annual net profit, it’s tough to compare.
Related read: How websites compare to real estate.
Less Competition In A Saturated Marketplace
Online companies that offer a niche product have less competition in the marketplace and provide a greater opportunity for yield on your investment. There are many who believe that the ‘build it and they will come’ mentality doesn’t usually work for online businesses but with the right product and a solid strategy, your returns can skyrocket.
Subscription boxes have been a very successful model when it comes to niche products with Dollar Shave Club being a standout example. 12,000 orders within 48 hours of their first video launch is nothing to sneeze at.
Sure, it might not be your main objective but one of the benefits of investing in an online business is your ability to sell the business and move on relatively quickly should you need to. If you do manage to make the business more successful then there’s the strong possibility you’ll sell it for a higher price than you bought.
The marketplace for buying and selling online businesses is growing substantially so you can buy and sell a business relatively easily using a quality online business brokerage. It’s not unusual for an online business to sell within days or weeks of listing, depending of course on valuation. Anything below $500k will usually sell fast.
Room For Expansion
Many online businesses have been created with a bootstrap mentality. They’ve grown over several years without capital injection from outside sources and have been successful enough on their own to get on your radar. By investing in the company and providing it with capital, you’re able to help it scale quickly.
This is one of the core advantages that Onfolio exploits when we buy and grow online businesses. We typically buy from founders who had one or two things they were good at, meaning that our increased resources and skill sets can unlock further growth and bring stability for our shareholders.
Unlike traditional investments, you’re not relying on appreciation to make money because you’re receiving cash flow. You can then further grow your portfolio by reinvesting the cashflow by adding more sites and growing existing ones.
Businesses with a subscription service provide a monthly or annual recurring revenue and affiliate or ad-based websites land you with regular commission or compensation.
What Are The Risks Involved?
There’s no perfect investment strategy and, like anything else that comes with the potential for a high yield, there are some unique risks to investing in online businesses that you need to be aware of.
Google SEO Algorithm Changes
The August 1 2018 update saw a lot of legitimate sites lose significant traffic with some still struggling or abandoned many months down the track. Staying on top of Google algorithm changes can almost be a full-time job and not being prepared to take action when it does happen is a huge risk.
With everyone and their mother dipping their toes into running an online business, from hobby blogs to eBay dropshipping hopefuls, it can sometimes feel like standing out is no longer possible. This is most evident when it comes to eCommerce businesses which means careful thought needs to go into choosing the right niche.
Drain On Your Time
Depending on what kind of website you’ve bought and how much work it needs, you could be in for some serious effort on your part. Unless you’re willing to hire some help. Some of the tasks involved could include:
- A new content and SEO strategy to rank for more keywords and improve the traffic
- Researching affiliate opportunities and negotiating better deals
- Increasing your investment in social media and paid advertising to help grow revenue
- Creating and maintaining an active email list
Remote Employee Base
Online businesses often have remote employees so one risk to consider is having issues with staffing and communication. While remote work is becoming much more commonplace, there are still many issues that can occur without the correct management processes put in place.
Operating In International Territories Increases Complications
Due to the nature of running an online business, they are often registered and operated in international territories. For example, a business registered in Singapore but shipping products to the US. This can make business operations more complicated than a traditional business and in some cases, legal disputes can occur.
Subject To Less Regulation Than Traditional Brick And Mortar Business
This can also be seen as a benefit but when it comes to the wide world of online businesses, it can be a tricky web to navigate. You’re given almost free reign starting out but the bigger your business becomes, the more susceptible you are to scrutiny. Which is a concern when there aren’t a lot of guidelines to follow.
As a side-note, our preferred shares are compliant with the SEC, bringing a level of regulation to the space unseen elsewhere.
Some products can be very popular for a short time and, within years or even months, be relegated to the annals of pop culture past. Think the fidget spinner craze of 2017 or the boom of face masks during the 2020 global pandemic.
Jumping on a trend is never a bad thing but it’s a huge skill to know when to get off the train so you’re not sinking money into a product that’s soon to be an afterthought.
Single-point Of Failure
Online businesses are often dependent on the owner or founder to be a critical function of the business. When you’re balancing small teams to keep costs down, it’s sometimes common practice to wear more than one hat and this can be a huge risk when it comes to whether to invest or not.
How Can You Mitigate The Risks?
I’ve said it before and I’ll say it again. Not doing your due diligence thoroughly is one of the top mistakes people make before investing in an online business. This probably seems very obvious but it’s also a pertinent point. Before investing in any business you’re going to want to do some due diligence, but with online businesses, this step becomes even more important.
As I’ve mentioned, there’s usually less regulation and a significant lack of transparency with online businesses so this can be easier said than done. This means you’ll need to read everything you can get your hands on and keep your eyes out for the ways sellers can try to cheat you.
If you’re keen to let go of the reins, there are specialist companies like us that can help with this. After dealing with similar types of investments over and over again, microfunds and holding companies know what to look out for. They allow you to invest in websites at a scale that’s much easier than going it alone, with the expertise of someone that’s done this many times before and the yields available when investing in a diversified portfolio of websites.
One other huge way that a holding company mitigates risk is by using its expertise to implement proper management practices in the businesses that it invests in. Often these businesses have grown without optimal management practices. With the expertise of a holding company, correct procedures and structures can be implemented to ensure the business runs more profitably.
As a final point, with a well-run holding company, you can expect clear due diligence and financial analysis performed to ensure that the companies that are bought and managed are likely to not only deliver profits but deliver an increase in profits in the medium to long term.