The one big mistake I see startups make when trying to buy a domain name

Domain mistakes startups make

Yesterday I wrote a post on my friend Matt’s blog talking about three things startup founders should know before buying domains, you can give it a read here if you’re interested.

Today I wanted to highlight the first point I made in that article as it’s one of the most common mistakes I see startups make and it’s a painful one. First things first, let’s talk about cybersquatters.

I can’t stand cybersquatters, they’re the scum of the Internet. Cybersquatters buy domain names that use someone else’s trademark in them so they can make money off of someone else’s work. Here’s a good example. Let’s suppose you start a company called “Morgan Software” you’ve got a Trademark on the name and you’ve been running it for years on MorganSoftware.com. Then you get an email from a client, someone bought MorganSoftware.co and put up a confusingly similar site, they’re trying to benefit from the hard work you’ve put into building your brand.

In this case, you could file a UDRP, a process setup to stock cybersquatters in their tracks, and legally get them to stop and take back this domain that really should be yours.

First a little primer on domain investing

Just like people buy physical real estate, hold it, and sell it for a profit, the same is done with domain names and has been for 20+ years. Entrepreneurs from some of the most well-known startups in the world own domains for investment purposes, big companies like Google and Microsoft hang onto some very valuable domains, and individual investors (like me 🙋‍♂️) also invest.

Domain investing is focused on buying generic domains that don’t infringe on anyone’s trademarks. A couple of weeks ago NAS.com sold for $720,000 and earlier this year Palace.com sold for $306,000, Kick.com went for $276,0777, and Results.com sold for $264,000 (Source – DNJournal). One-word .COMs typically sell in the six figure range, but they can and do sell in the seven figure range and sometimes even the eight figure range like Voice.com which sold for $30M last year.

Given that one-word .COMs usually carry at least a six-figure price tag, many startups find themselves in the two-word .COM or one-word .IO, .AI or .CO camp, especially as they’re just getting started. A one-word non .COM can often sell for 1/5th – 1/10th of what it’s corresponding .COM would sell for.

Last month Sun.io sold for $49,995 and two months ago Jackpot.io sold for $48,500 (Source – NameBio), I can tell you – Sun.com would very likely be a seven figure sale and getting it for $500k would be one heck of a deal so you can see how a name like Sun.io at $49,995 makes a lot of sense.

So how much should startups spend on a domain?

I’ve spoken with a number of VCs I know here in SF and many of them have shared a general rule of thumb specific to consumer-facing startups – founders should be okay spending ~10% – 15% of their raise on a good domain name. So for a startup that raises a $3M Seed round (pretty common Seed these days) a budget of $300,000 – $450,000.

Pre-Seed startups likely won’t have a six-figure budget for domains and if you raised $500,000 spending more than about $50k on a domain name could be painful. This is where two-word .COMs are a great bet or one of the many new gTLD options which you can often find solid names in the sub-$10,000 range. There are plenty of startups with lots of funding that still are more than happy to brand on non .COMs, Zoom is one of the most well-known which stuck with Zoom.us until it was well into unicorn status 🦄

Okay – so what’s the big mistake startups make?

The biggest mistake I see startups make when they go to buy a domain name is thinking that just because last month, or even last year, they decided to call their company “CompanyName” they are somehow entitled to CompanyName.com.

I’ve seen cases where companies like Google own the name and the startup demands that Google gives them the name since they aren’t using it. In other cases I’ve seen startups make a huge mistake and try to steal the domain name from its legitimate owner abusing the UDRP process. When this happens, the rightful owner can file a RDNH (Reverse Domain Name Hijacking) claim and you might even find yourself in the Hall of Shame, a public database of people who have tried to steal domains from their owners.

Remember, startups are buying one-word .COMs for six-figures literally every week. If you think you can get one for $10k, $15k or even $50k from someone who owned the domain ten years before you even thought of starting a company…think again. Don’t make this mistake because if you do file a UDRP, get hit with RDNH and end up in the Hall of Shame, you’re not only ruining your chances of getting the domain, you’re also hurting your reputation online.

Just like I wouldn’t show up at your parents house and ask them to sell their house to me for the price they paid in 1960’s, asking a domain owner to sell their domain name for pennies on the dollar doesn’t make sense. If there is a big juicy name you want but can’t afford yet, just be honest with the owner. Many domain investors offer flexible leasing options and some will even take a combo of cash and equity combined with a pay over time option that can make a deal possible sooner than you’d think.

There’s no doubt that a good domain name makes a huge impact on your business. For consumer-facing companies it can be a make-or-break and for new brands it can give instant credibility. I always believe you should treat people the way you would like to be treated, a little kindness can go a long way. So if there’s a domain name you want, first – make sure you’re thinking logically about how much it’s actually worth (i.e. if it’s a one-word .COM, expect a six-figure price tag, a two-word .COM, sure $2,500 could work!) and then do the right thing and approach the owner and treat them the way you’d like to be treated.

And there you have it – if this helps one or two founders get the domain of their dreams I’ll be a happy camper! 🏕 Of course I’m always open to questions, comment, suggestions, you’re welcome to share away in the comment section below.

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