What does an annualized return rate of 89% mean to you?

For most investors looking to grow their savings, such a return would be phenomenal. However, in the past year, index funds saw a rise of 10%. They are managed by mutual funds, which account for 13.5%, and hedge funds, which make up 19%, seeming to align more closely with how investments typically operate. Of course, the average investor’s stock picks don’t yield triple-digit investment returns. Surprisingly, once you factor in the fees for mutual and hedge funds, it appears that index funds actually come out on top.

Yet, there exists an investment opportunity that could potentially offer you a 189% or triple-digit investment return rate.

It’s not just on Wall Street; it’s in the cloud.

The 189% investment involves acquiring online businesses, then holding or flipping them for profit. This is akin to investing in art or real estate, but your investment is in the digital realm. Most other investments you make don’t offer the same level of control over their use.

Beyond purchasing stocks or bonds, you have little way to increase their value. However, this isn’t the case with online businesses, where your control over the investment could be greater than any other investment vehicle.

It’s no secret that many millionaires have become so by owning their businesses. Because you can control how the business operates, you often can guide it to explosive growth that other forms of investment cannot match.

Still, businesses are far from passive. Unlike mutual funds or 401ks, online businesses often involve more active parts and management. This makes treating a business as an investment strategy challenging.

The cool part is, if you focus solely on online businesses, you can significantly reduce your time investment.

A physical pizza shop might require at least three people working 40 hours a week to turn a profit of $3,000 a month, while an online pizza store might only need an hour’s work a month to reliably bring in $3,000 a month in profit.

Though starting such a business might take more than an hour, once up and running, maintenance dramatically drops compared to traditional businesses.

To understand how to profit from cloud-based businesses, you first need a bit of insight into digital assets.

After all, investing is the application of knowledge.

The World of Online Commerce

In today’s market, hundreds of thousands of online businesses mature daily. When I say a business “matures,” I mean they have a solid record of profitability and growth. With mature investments, there are enough data points to judge whether something is worth buying or not.

A decade ago, this was hardly the case for online businesses. The internet was just starting out. Today, the internet is ubiquitous. Business processes have migrated online in astonishing ways.

What Is an Online Business?

Before deciding to invest in an online business, you must first define what an online business is. It’s simply a business that operates entirely online. Before deciding to invest in one, it’s best to look at e-commerce fulfillment trends to see where you might succeed.

For example, you might own an e-commerce store with a warehouse full of physical goods, but these physical goods aren’t sold through a traditional storefront or mall. Instead, all these products are shipped out of your warehouse to customers’ homes after they input their credit card information into your merchant account.

However, online businesses can take many forms. Some might be software-based, where people pay a monthly fee to use your software. Other online businesses might make thousands or even millions a month without any products at all. They just display ads or use affiliate links to earn commissions without owning any of the products or services they sell on their websites.

Different types of online businesses come with their own sets of advantages and disadvantages. If you’re interested in the details, check out my post on the 11 most popular online business models. For our purposes here, just know that online businesses typically fall into three main monetization types:

Physical products for sale
Services offered
Content websites with advertising
Who Buys Online Businesses?

If you’re investing, it’s always wise to understand your motivations. What are your long-term goals with acquiring an online business?

For this, you should familiarize yourself with the various types of online business buyers to understand which category you fall into. Knowing the style of the business model you’re considering and which buyer role benefits most from that particular business model is crucial.

Every investor has different goals, and your acquisitions should align with your unique objectives.

If we were to generalize different types of business buyers, we could look at seven buyer roles:

Newbie Norm
DIY Dave
Lifestyle Larry
Portfolio Paul
Strategic Sally
Flipper Fred
Investor Ivan

Newbie Norm is just starting to buy online businesses. This is everyone’s starting point. They might be a bit worried about whether the business they’re buying is legitimate because they don’t yet know what to look for. For those just starting, we recommend learning how to conduct due diligence to ensure the first business you buy is a healthy, clean business that will bring you a nice monthly dividend.

DIY Dave is the next stage most Newbie Norms enter after buying their first few businesses. These individuals often see opportunities for improvement in the businesses they buy. It could be better content with higher conversion rates or a traffic source they’re very familiar with that the business they bought isn’t currently using. Either way, these individuals tend to like doing everything themselves. While it’s great to learn how to truly do this at the start, it’s important not to become too much of a DIY Dave. If you want your business to scale, you need to learn to delegate.

Lifestyle Larry is probably what most people imagine when they think of “making money on the beach” internet marketers. These individuals have bought a business that requires very little maintenance, perhaps only an hour or two a week, ultimately supporting their lifestyle. This type of buyer is more interested in lounging and experiencing life than worrying about amassing a large financial nest egg.

Portfolio Paul investors are probably most similar to mutual fund or index fund investors. They diversify their acquisitions through a variety of different business models but usually only buy businesses that require the least amount of management time. Portfolio Paul’s goal is to create a large cash flow based on multiple income sources.

Strategic Sally is often someone who already owns a business and is looking for opportunities that can add synergies to their existing business. A good example is a marketing agency owner buying software for creating referral videos, or a dog food e-commerce store owner buying a content website about dogs to drive traffic to their dog food e-commerce store. They hope to benefit their existing other businesses with strategic purchases.

Flipper Fred might be one of the most interesting buyers we’ll discuss in more detail later in this article. They buy a business, increase its profits as much as possible, then sell the business for a premium, capturing the value they created in the business. Often, Flipper Freds will focus on one business model and master it. This way, they can buy the same types of businesses with the same types of problems and solve those problems over and over again.

Investor Ivans are very similar to Portfolio Pauls in that they invest in many different businesses. However, unlike Portfolio Pauls, they usually have joint equity in the deals they purchase. For example, they might put up the money to buy an online business but don’t own it outright. They might let an operator partially own the business and be responsible for all the work of maintaining and growing the business. Or they might invest in a pool of online businesses where they get a return based on a percentage of the profits. This last style is something that’s just starting to emerge in the online business world, and it’s incredibly exciting but still largely unexplored.

If you’re interested in passively investing in someone else’s startup, check out our Equitybee review.

The Risky Business of Crazy Investment Returns

The prevailing view in most investment circles is that the higher the investment return rate, the higher the risk. This is especially true for investing in online businesses.

These businesses can be fraught with risk. If you acquire a company whose website traffic all comes from Google organic search and Google suddenly penalizes that site, that asset could lose its value until the penalty is recoverable.

Similarly, the product supplier for an e-commerce store could suddenly stop producing the core product for some reason. If that e-commerce store doesn’t have backup suppliers, they’re in trouble.

The good thing about the risks of online businesses is that the higher your skill level, the less risky it becomes. There are plenty of experts who can fix almost all Google penalties, and many physical product sellers have a Rolodex of suppliers and factories they can call upon when needed.

Mastering a business model and understanding how to mitigate its associated risks might take time, perhaps a year or two. Even so, risk never completely disappears, just like mutual funds, which seem harmless, always carry some risk.

Obviously, you could lose your entire first investment when you’re just starting. That’s why you shouldn’t put all your startup capital into one online business but rather try to diversify across several smaller online businesses (but initially stick with the same business model so you can better understand it). Learn as much as you can about that particular business model before making a purchase. But remember: if you never take risks, you’ll never receive rewards.

As you start to understand a business model more deeply, you’ll begin to gain an investing edge, something no veteran stockbroker can give you. After all, most professional stockbrokers aren’t much better than those who randomly throw darts at a board to decide which stocks to invest in.

While risks are always present, you can mitigate many of them by increasing your skills. However, there’s another way to further reduce risk.

How to Turn a Series of Online Businesses into a Portfolio

Combining multiple business models can mitigate many risks. Over time, you need to diversify the following:

Monetization – How the business makes money
Traffic – Where visitors come from and how they interact with your business
Business Model – What kind of website your business is (content site, e-commerce, Amazon FBA [Fulfilled by Amazon])

Combining these three methods can save you if one profit model or business model suddenly dips. This is especially important if you end up acquiring an online business that is highly seasonal (for example, a business that sells Halloween costumes).

For Beginners

If you’re just starting and your online business skills need improvement, the best option is content websites that profit through Google AdSense or the Amazon Associates affiliate program.

These sites often don’t require much maintenance, with some owners not touching them for months at a time while still making money.

Creating a portfolio of Amazon affiliate websites can also offer you strategic benefits, as the more products you sell through the Amazon Associates program, the higher the percentage you earn on every product sold in a month.

A natural upgrade from a Google AdSense and Amazon Affiliate website portfolio is an Amazon FBA business (Jing Sourcing has an excellent guide on Amazon FBA here), which is more about Amazon, where you sell physical products and store them in Amazon’s warehouse, and they take care of all the inventory management and shipping.

With this business, you order products yourself from factories/manufacturers and send them to Amazon’s warehouse – they handle the rest – these days, Amazon can handle everything from storing goods in real life to storing data using Redshift.

When you acquire an already profitable Amazon FBA business, you can link out your Amazon FBA listings from your Amazon affiliate websites, bringing more traffic to the listings.

This is the natural diversification of your portfolio as it grows, helping you start to break down the different risks involved in acquiring online businesses.

The next thing a portfolio manager might consider is hiring an operator. Operators can help you manage different businesses.

For example, if you have ten content websites, you could hire an operator to handle all the outsourcing work for content creation. Similarly, you could pay a salary to someone to focus on ordering products for your e-commerce business to ensure the warehouse is never empty when orders come in.

As you grow, an operator becomes a more viable way to leverage and significantly expand your portfolio. You might wonder why these operators wouldn’t just start the business themselves if they can run these businesses.

The answer is simple: most people are too risk-averse to become mature entrepreneurs or investors on their own.

Where and When to Buy Online Businesses?

You might be wondering now…

Where do you even find these businesses for sale?

The answer varies. There are primarily two places to find them:

Private deals—where you have to do a lot of legwork yourself
Online business brokers—this takes a lot of the legwork off your plate

Private deals can be lucrative, but if you’re new to investing in online businesses, it’s not recommended. There’s a lot you still need to learn. For many investors, they almost never go the private deal route, always preferring the benefits brokers offer them.

Online business brokers typically vet businesses to ensure all their traffic and revenue are legitimate. This makes it easier for an investor to conduct true due diligence.

Additionally, business brokers can showcase on-sale goods, making the whole process very simple—exactly what we do in the marketplace.

Timing

Once you’ve found where to buy businesses, you need to determine “when.”

First, you should understand the business model you’re buying. This is why I recommend AdSense and Amazon Affiliate websites to first-time investors because these business models are relatively easy to grasp.

You don’t need to be an expert or even know too much about the model, but having a basic understanding is key to running these businesses.

When you get into more complex business models (like software), you’ll want to have a deeper understanding of that business model.

Once you’ve decided on the right business model to focus on, it’s time to concentrate on crafting a game plan. Ask yourself the following questions:

What is the goal of each acquisition?
Do you want to increase the revenue or traffic of each asset?
Do you want to drive traffic from these websites into other businesses like Strategic Sally?
Or do you just want to buy and hold, then let the dividends flow in monthly?

After answering these questions, you’ll have a game plan. A game plan allows you to expand your due diligence checklist.

The core of your due diligence checklist should be a list of items that allow you to quickly disqualify a business. You’re looking for any reason to say no to the business. Your game plan also allows you to add certain opportunistic due diligence checkpoints:

If you’re looking to increase natural search engine traffic, you might look for content websites that are ranking number one but potentially not in the first position.
You want the website to have done no conversion rate optimization, so you can perform split tests with ad placements and increase revenue by finding the best ad spots.
The website hasn’t fully tapped into the niche market’s potential. Maybe a niche market has only 10 articles supporting it when 300 profitable content pieces could be produced

Once you have a basic understanding of the business model you’re comfortable with, you should have a game plan and a due diligence checklist to help you immediately disqualify most sites you see and help you determine if you can grow a specific business.

At this point, you’re ready to buy an online business.

Pre-lowering Risks

Needless to say, you should never spend your emergency funds on a business. Some people think that if they spend their last few thousand dollars on a business, all their problems will be solved.

This is rare, and we don’t recommend doing this.

While you shouldn’t spend your emergency funds on a business, that doesn’t mean buying an online business can’t be incredibly profitable.

The Career of Flipping Digital Assets for Money

As you continue to research and continuously buy and build within a single business model, you’ll start to notice commonalities between all your purchases. This is an opportunity for savvy investors. Identify all the common themes and turn them into another list.

When you have several digital assets that are roughly the same in terms of the business model, you’ll have a good grip on these commonalities.

This means you also know what can bring you the most profit by fixing problems in the business or implementing measures that haven’t been implemented yet.

For example, you might find that almost 100% of the AdSense websites you want to buy have no email list. You could add an email list, offer some content for free, such as a report or memo related to the site’s niche area, then send an email to this list every time you create a new article.

Eventually, you could have a large autoresponder email sent to every new subscriber, leading them through every piece of content you’ve written on the site. This model can bring the same visitors back to your site time and time again, creating more opportunities for them to click on your AdSense ads.

Document everything you do to each business you take over and the profit growth you create. This will help you greatly when looking for more deals that can be turned into profitable, sellable assets.

Once the average monthly income of the acquired business has significantly increased (say, within six months), it’s time to plan to sell the asset.

If you have an AdSense website generating $5,000 a month in revenue, and you increase that site’s income to $8,000 a month, then you’re in a strong position. You might have bought the site for $110,000, using a 22x multiplier (in valuations, part of the formula is to multiply the monthly net income by a multiple, usually between 18-40, to reach a fair selling price).

However, now that the site’s income has significantly increased and has a longer track record of profitability, you can turn around and sell the exact same business for close to $208,000, say at a 26x multiple, to reflect the longer history and more solid performance record, or a 189% investment return rate, not including the $5,000 to $8,000 a month you were making during the process of building it up.

We see people do this over and over again.

The beauty of buying an already profitable online business is that most of the hard work has been done for you:

Finding a profitable mature market has been completed
The business already has traffic and sales

You just need to optimize the site.

Once you’ve created a system for identifying these types of businesses, you can do one of two things:

Buy and hold the online business
Buy and increase the business’s revenue so you can later sell it at a higher price

Either way, they’re great options.

Option 1 typically pays you a monthly dividend that professional stock investors would drool over.

Option 2 can carve out a whole new career or side hustle for you (as Flipper Fred), where you leverage these assets, make improvements on an already solid foundation, then sell them at a higher price while collecting a monthly income the whole way through.

While investing in online businesses can be a risky venture, it can also be a very profitable one if done with due diligence and strategy.

All it takes is a game plan—plan your work, then work your plan.