Michael ?Zappy? Zapolin has a track record of notable online business successes. Among them are purchasing Beer.com for $80,000 and Diamond.com for $300,000 ? and then later selling each for $7+ million.
In this master class-like interview, Zappy walks us through his methodology for building maximum value in premium, generic, category-killer domain names though his technique of ?just enough? development and marketing.
Zappy is co-founder and CEO of InternetRealEstate.com. He began his career at Drexel Burnham Lambert, later joining Bear Stearns, where he became one of the youngest vice presidents in the 100-year history of the investment bank.
David E. Weslow, Attorney at Law provides legal representation for clients ranging from individuals to Fortune 500 companies in relation to domain name transactions and disputes, trademark and copyright claims, and web hosting and content liability issues. A former software and web developer, he regularly assists clients with cutting-edge issues involving law and technology.
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http://www.domainsherpa.com/michael-zappy-zapolin-interview/
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Here?s your program.
Michael Cyger: Hey everyone. My name is Michael Cyger, and I?m the Publisher of DomainSherpa.com ? the website where you come to learn how to become a successful domain name entrepreneur and investor directly from the experts.
I pride myself on being a lifelong learner. This means that I approach life, both professionally and personally, with an open mind and an eye for improvement and innovation. And I know the best way to take advantage of this is to observe others, and learn what they are doing, and understand why.
Today?s guest has a track record of several notable online business successes, and has developed relationships with some extraordinary people. His process for online business success begins by securing a quality domain name.
Today we are joined by Michael ?Zappy? Zapolin ? Internet visionary and entrepreneur who most recently added the title of Film Maker to his bio. We are going to learn about that later in the show. Zappy, welcome to the show.
Michael Zapolin: Yeah, great to be here, Michael. I love this show.
Michael C: Thank you. First off, everyone calls you Zappy. I want to know who was the very first person to call you Zappy.
Michael Z: It was some kid in my neighborhood growing up when I was real young and just started the nickname, and people, for whatever reason, love saying it. And then, later in life, my first name is Michael and there are so many Michael?s out there. I guess my parents weren?t overly creative back when I was born. And so, I get on these conference calls and it would be like: ?Mike, Mike, Mike,? and I have like two or three Mikes on there. So I just said, ?Look, I am just going to go with Zappy,? and it has been pretty good. You get off the call and it is pretty clear which person was speaking. So, that was key.
Michael C: I love that. I had the exact same problem growing up. There was always at least two or three other Michaels in my Elementary School classes. It seemed to thin out a little bit as I got older, but I need a good nickname like that as well. So, you have blazed quite a trail on the Internet for the past fifteen plus years. Do you remember the first domain name that you purchased?
Michael Z: Yeah, legitimately, the first domain that I bought was Beer.com. And the way that that happened was I was making infomercials at the time, and I had a pretty successful Internet company going, and I had a couple of shows that were doing really well and I was making money. And I started to think to myself about what I was doing, and I thought: ?Wow, if I could just get my own 24-hour television network with 24-hour ordering, that would be like the Holy Grail. If I can find that, then it is going to be incredible.? And 1997 or so I saw the Internet and I was like: ?Oh my God! That is a 24-hour network. 24-hour ordering. This is going to be incredible.? So, I came up with the idea was that if I was going to enter the Internet, I did not want it to be like my infomercial business, where I had all this process where I had to find a product and license it, and then market it and get people to know about it. I thought to myself: ?If I could eliminate some of the process by having like a category generic domain name ? something like Beer.com or Diamond.com.? I was thinking: ?I would already have credibility, I would already have some traffic, and then, when other people came on the Internet, I would rise with the tide.? And I thought: ?Wow, this is great. Let me go find a domain name to work on.? And I thought to myself: ?If I am going to jump into this business and take a few years to develop it, I want it to be big enough so that, when I am done, it is not like ForMike@Table.com and then I build it up, and there is nobody to sell it to.? So I did what I called my Super Bowl Test, which was: If it is a big enough category to advertise at the Super Bowl, then that is a big enough category for me to spend a few years developing. So I made the list and it was like Beer, Cars, Computers, Insurance, and Diamond Rings. Top of the list was beer, and so I typed in Beer.com into my browser. This was now 1998. And up comes this kind of what I would call a hobbyist site. It was a young kid ? 21+ year old kid ? who had pictures of him and his friends on there. They were like throwing up from drinking too much. And, at the top, there was a banner and it said, ?We need advertisers so we can buy more beer.? And I was like: ?Wow, that is interesting,? so I look him up in the WhoIS Directory at the time and it comes up with this kid. He is Colorado and I am thinking: ?The guy is in Colorado and he cannot find a beer sponsor? Like you really need some marketing assistance.?
Michael C: Yeah.
Michael Z: So, I, again, thought to myself: ?Before I just jump head first into the beer business, I would love to eliminate some of the process of getting to all the Millers and Budweisers. How do I do that?? And I thought: ?I know some guys that do liquor promotions all around the country. Maybe they have some access to these beer companies.? So, I approached the owners of that company and they had Miller and a couple of other beer companies that were already clients.
Michael C: So they were agencies. They were marketing agencies?
Michael Z: Yeah, they were a specialty agency, where, if it was Bacardi night in two hundred bars across the country, they would have the good looking people there with the signage, and they would be passing out the schwag and everything.
Michael C: Got you.
Michael Z: But they had a couple of beer guys. So I went to them and I said, ?Look, I want to make Beer.com like a beer advertising portal for people to hang out, but also advertisers to be able to connect with these passionate beer people.? So, they loved it. They were smart guys. They said, ?Let?s do it,? so we approached the owners and he said, ?Yeah, I will sell you Beer.com and let you develop. It looks like you have got a lot of good stuff going on.? So we had to come up with a price at the time. This is 1998. So, I said, ?Look, let?s just pretend that this is worth one hundred thousand dollars. And I think we should give you eighty thousand dollars in cash, and you keep twenty percent of Beer.com because I am going to develop it and all of these advertisers are going to come in; and you are going to bummed out if you do not have a piece of this as it grows.? So, he said, ?All right. Sounds like a good deal.? We gave him that eighty thousand in cash. He actually claimed he was a retiring to Breckenridge along with eighty grand.
Michael C: Love it.
Michael Z: Yeah. So, he went off. He was doing his thing. I just, very inexpensively ? several thousand dollars or less -, put a new looking Beer.com. So, it was How to Brew Beer, or Rate Your Favorite Beer, or Get a Free Beer.com Email. And what I noticed was the cool thing about the email was I was giving them out and people were signing up for FallingDownDrunk@Beer.com or Michael@Beer.com, but a few hundred of these were being registered every day and given out. And so, I was excited about that. And I, again, wanted to eliminate some of the process, and this is one of the business mantras that I have; is eliminate the process in your business. So, instead of waiting for all the beer companies to figure out what we were doing and how it matched with what they were doing, I put out some press in the industry about the fact that we were redeveloping Beer.com into this beer portal community site. And boom, I get calls from all the beer companies.
Michael C: Really?
Michael Z: Calling and asking: ?Hey, we would like to advertise or we would like to talk to you.? One of the calls I got was from McKenzie up in Toronto, and they said, ?We represent Interbrew, which is now called Ambev ? a five billion dollar beer company -, and we want you to come up to Toronto and talk to us about how we could get involved.? So, I went up to Toronto; and this is from a negotiating domain standpoint. This is probably a classic case.
Michael C: And at this point, you had a website ? what some people may call today a mini-site ? with maybe five or ten pages on How To Brew and Where To Buy, and Hops and things like that, but you did not even have this social community, where people could interact or rate beers. You had assigned email addresses, and that was pretty much it.
Michael Z: Yeah, it was really thin. It was very thin. It was kind of like we were a poster for what was going to come.
Michael C: Right.
Michael Z: And so, classic negotiation with Interbrew. They would get me in their corporate suite and they are feeding me beers and stuff, and they say, ?Look, you guys are having fun, but we are a giant beer company. So, no matter what you do, it is never really going to add up to what we could do. So, why don?t, instead of doing your crazy stuff, you just let us buy Beer.com from you?? And so, I said, ?All right. Well, I guess I am probably up for it at the right price, but we are having a good time.? So they said, ?All right. Well, we want to give you one million dollars. You are going to be a millionaire,? you know?
Michael C: They just threw that out. You are sitting around the table; you are drinking beers. They are like: ?How about one million dollars??
Michael Z: Yeah.
Michael C: Back in 1998.
Michael Z: 1998. And they were super psyched to give me that. And again, I said to them: ?Look.? I go: ?Well, we already have some advertisers that are going to come onboard, and we are having fun, and we are developing maybe even our own kind of beer, and we have got a network of people, and we are giving these Beer.com emails.? I go: ?I do not think my partners are going to let this thing go for less than ten million dollars.? And they were like: ?What? Ten million dollars? That is ridiculous. All you have is a placeholder site.? And I was like: ?Well, we are having fun, and you can advertise or I am sure (Unclear 10:45.8). We can figure it out.? So they said, ?All right. Well, hold on. We are going to huddle up.? So they huddled up and they came back in the room and they said, ?How about seven million?? And I was like negotiation. You try not to get too crazy-eyed, but at the same time you do not want to take a step back where they go: ?Oh, wait a minute, but we meant five.?
Michael C: Right. You got to make them earn it. Yeah.
Michael Z: I was like: ?I don?t think my guys are going to let it go for less than ten,? but I said, ?Let me make a phone call. I will huddle them up.? So they said, ?All right.? So, they gave me a few minutes, I called my buddies, and they were freaking out like me. So, I get back into the room and I said, ?Eight million; we will do it.? And they gave me all this rationality like: ?Seven million, and we give you a bunch of beer and schwag,? and I was like: ?All right. Let?s do it.?
Michael C: Is that like beer for life? What would it be?
Michael Z: Yeah, it was not beer for life, but it was like enough that they felt like they had tricked us at the end, which is always, I think, how you want that negotiation to end.
Michael C: Sure.
Michael Z: So, it was really a great experience. And then, when I called the kid, one of the great phone calls of my whole life was when I called this kid who sold me Beer.com and I was like: ?I just sold Beer.com!? I go: ?I am sending you 1.4 million? because he had twenty percent. He?s like: ?What? You sold it for 1.4 million? Oh my God!? And I was like: ?No, no, no. I sold it for seven million; you are getting 1.4 million.? So, it was like a lot.
Michael C: Unbelievable. Have you stayed in touch with the kid that originally sold you Beer.com?
Michael Z: Yeah, I mean I track him along the way, and he has done some really cool stuff since then. He was already into like Internet hosting and all kinds of cool stuff. So, he is really done. He is a smart guy. I do not want to discredit him. He is not just some drunk college kid. And just to show you what the environment was like, you had to be pretty creative back then. He originally, when he called up and wanted to get Beer.com, we had to actually physically call up to get these things, and he said, ?I want to reserve Beer.com,? and they said, ?Well, you cannot because you have to have a business use for a domain.? So, he went out and he set up a company; and his first name is Bill, so he set up Bill?s Energy Exchange Reserve (BEER). And he called them back and said, ?All right. I need the name,? and they gave it to him.
Michael C: Wow, smart guy.
Michael Z: Yeah.
Michael C: All right. So, let me unpack this because it?s a phenomenal story. Of course, the late ?90s leading up to 2000 was a boom time in the economy. The .COMs were taking off. Everybody was investing in Internet startups at the time, so it was perfect timing for you to buy Beer.com in ?98, get it for a great deal, throw some vision onto what it could be, and convince other people to do that. Would you say that timing was one of your best allies in this deal?
Michael Z: I actually think it is sort of always the same timing because you are always trying to come up with what the pricing is and what the eventuation of the situation is going to be. So, when I bought that back in 1998 and I told people I was going to pay one hundred thousand dollars, they were like: ?Are you out of your mind? That is the stupidest thing I have ever heard,? you know? And I was not getting a lot of feedback like: ?Great price,? you know? I was getting quite the opposite because it was a little bit early. And leading into the next domain name that I wound up buying was ? after that experience I went right back to my Super Bowl list and I was like: ?Oh my God, what is the next category?? So I am looking at the list and I am thinking: ?What industry is going to be effected by the Internet over time?? And I saw the name Diamond.com on there, and I was like: ?It is pretty cool because a diamond, they just De Beers it or somebody mines it out of the ground. And then they cut it, and they finish it, and they cut it again. And then they sell it to a wholesaler, and they sell it to retailers, and there is all this process and all these markups; and if the Internet could compress that, then it would be a better system for people to be buying diamonds.? So, at the time, I reached out and it was a software company in Texas. A business-to-business software company called SI Diamond Technologies; and they had taken Diamond.com. I showed them what I did with Beer.com and I said, ?I want to take this thing and do what I did.? So, they said, ?Okay.? So we agreed on a price, which was three hundred thousand dollars and them keeping about twenty percent of the LLC so that they had upside too. And, again, at the time, to make the point of what people were saying, I said, ?I am going to buy Diamond.com for three hundred thousand dollars,? and they were like: ?That is ridiculous. Nobody is going to buy a diamond on the Internet. You know what I mean? Yeah, maybe a fifty-dollar little trinket or whatever, but nobody is buying a diamond on the Internet.? So, for a domainer, you have to be willing to go against all the nay-sayers who are saying bad idea; here are all the reasons this is not going to work. You have to put your blinders on because, again, even today, it is such a future category and future vision that you have to ignore all those people. So I ignored them and we bought it. We, again, put up a very thin site. It was like How to Buy a Diamond, Diamond Auction Sites, and Diamond Retail Sites. We were not even selling anything. I put up press about what I am doing on Diamond.com ? what it is going to be. Of course I get calls from all the diamond companies. This is now 1999, so there was starting to be a frenzy. And I spoke to De Beers and a bunch of other pretty good-sized companies. Some just totally did not get it. And De Beers said, ?Look.? I wanted crazy money and they said, ?Well, we do not think we can disrupt our diamond channel that we have right now. We have plans to go direct in the future, but it is quite a ways off. You should be talking to one of our major site holders ? one of the people that we sell to ? because they are going to get in and they are already thinking retail.? So, they matched me up with a guy named Beny Steinmetz out of Israel, who is one of the big diamond buyers out of Israel. And I contacted him. He immediately got it. He had started a company in the online diamond space. He had got one hundred million dollars from SoftBank and he was rolling along. So he had a management team. I did a deal months after buying that Diamond.com for seven figures of cash, plus equity in this company that was being managed that had a whole budget and Beny Steinmetz behind it, and just kind of put that deal in place and moved back to the list.
Michael C: Wow. So, it sounds like you have got two deals now. The deals were done, the sites were built, and then you sold them off. And they almost seemed identical, Zappy. They seem like you had a category killer domain name ? something that has wide mass appeal. I love what you call the Super Bowl test. I have never heard of that before. So, using anything that might advertise to the masses on Super Bowl, so it has got to be an enormous industry ? something that a majority of people in the United States are going to purchase potentially by watching the Super Bowl commercial. And then, you put a website. You have a vision of what it could become someday. You put out press regarding that vision. You get as many interested parties thinking about the deal; then you negotiate and you close it.
Michael Z: Yeah.
Michael C: So it seems relatively easy. Can something like that be done today do you think?
Michael Z: Yeah, I mean it is happening all the time. I think the mistake that people make is they are not willing to do some of that really simple stuff. They will get a good domain name or a great domain name and they will just try to market the domain. And it is like such a waste because, if I had not put up that placeholder for Interbrew to see what it maybe could become or Beny Steinmetz to see what Diamond.com maybe had the possibility, I would have had to rely on their vision to happen. And I do not want that.
Michael C: So, instead of hoping that somebody else is going to have the vision of what it can be and then realize the value of that, you are saying here is what it can be; now put your value on that.
Michael Z: Yeah, and I would add to that, that it shows proactivity so that, when the guys at the big beer company said to me: ?Sell it to us,? and I look back at them and go: ?Well, I am having fun and I am doing all this stuff,? it was like legitimate.
Michael C: Right.
Michael Z: It was not just I got a domain name and hey, I might do something. So they had to like factor that in, and I think any time I am buying a domain name or selling I always look at how the person is using it; and as soon as I see how they are using it, it gives me a much better indication of where their pricing is probably going to be because to walk away from the opportunity is something that you are able to factor into your price. And most people do not do it; and that is like kind of the tragedy of domains because it is somewhat easy. And when I describe, let?s say, my next couple deals, I went much deeper on the development because of the time and place, or the opportunity that I saw and what the methodology is seems to be the same. And I think I am doing it today and I have done this in the past few years and had some of the same types of successes doing that along the way. So, it is not a 1998, 1999, and 2000.
Michael C: Yeah, it is not a pre-2000 model that only works there. Okay. Let me ask you a couple more questions about both of these two deals, and then I want to talk about some of your newer deals, Zappy. The step in the process where, after you have developed sort of Version One of the website and before you sell it ? that step right there is market the hell out of it. How do you take your vision for what the site can become and get that out into the public in front of the people that may be potential acquisition targets?
Michael Z: So, that is a good question. Again, my thinking is that you have to be able to give them something visually to show what is possible, or where you are going. That does not always mean that they want to go that direction, but it gives a sense of forward momentum. And so, when I do that, what I try to do is to leverage the press because that is great. Every industry has industry press, and those people you know are reading the industry press. So, when they see that in the industry press, it has another level of credibility because they start thinking: ?Oh my God, if I am seeing this, my competitors are seeing this too.?
Michael C: Right.
Michael Z: And then, third, I will make a point of contacting all the major players in the industry. Contact them. CEOs; Heads of Marketing. Send them an email. Send them a screenshot of the site. Send them a link. Send them an article that recently ran in the industry press. And just create that anticipation and some of that desire in them, where some of these people resurface a year or two/three years later and you have laid this foundation along the way. And I will never forget. The next deal that I wound up doing was Computer.com. And we bought Computer.com and the phone number 1-800-COMPUTER. And the idea was, in 1999, when we bought it was to launch with a Super Bowl ad.
Michael C: Yeah, I want to talk about that. That is a great story, Zappy. Okay, but hold on. I want to back up for a second because I am going to come to Computer.com because I have watched that Super Bowl ad. So, in that process step where you are marketing it, you want to go out to the industry trade magazines. So, if you are running Beer.com, you go to Beverage World, for example, which is one of the largest trade magazines ? it has been around for one hundred years ? and you want to try and make sure that they write some sort of Editorial about Beer.com launching; how it is going to be an industry focal point for consumers to come together and what your vision is for the future.
Michael Z: Exactly.
Michael C: So, they go do that. Not Beverage World per se, but one or more of the industry trade magazines goes and does that. And then you are going to take that link to the website, or you are going to take that PDF of the print magazine article, and then you are going to find the contact address for major CEOs in the industry and you are going to email or write to them.
Michael Z: Yeah, and nowadays it is so easy. You have LinkedIn; these places where you can literally figure out who is who at the corporation, send them a message, email them, call the company, and say, ?Hey, I am sending John Smith an email.? It is so simple now.
Michael C: It is a lot easier now. You can go onto Elance. You can hire somebody for fifty bucks to find the CEO contact email address or guess the email address, and you print off some letters, you FedEx it to the address, you call the secretary, and you say: ?Hey, I am sending something very important. Can you make sure it gets on the desk? It is arriving tomorrow,? and you are done.
Michael Z: That is it.
Michael C: Like for five hundred bucks you have got the attention of every single major CEO in the industry.
Michael Z: Yeah, absolutely. And getting to where I was going with the Computer.com thing is if you can get an industry expert involved in what you are doing, that is going to be an incredible thing. So, Jeff Taylor, who is the Founder of Monster.com, who had done Super Bowl successfully the year before. We reached out to him immediately when we bought Computer.com. And when he heard computer and said, ?You did Super Bowl successfully. We think we could do it with these properties. What do you think?? And he, number one, got really excited, but the point I was making earlier was I asked Jeff Taylor at some point in my relationship with him: ?How do you figure out? At Monster.com, you are buying all these different companies. How do you figure out which ones to buy?? And he is like: ?I wish it was a little bit more scientific.? He was like: ?I will hear about some company and then somebody in my company will say something, and then I will see a news story.? He was like: ?By the time somebody pops up two or three times, they are on my radar and, who knows, if it is the right fit, we might buy them.?
Michael C: Great advice. So, you need to try and get as much PR as possible for whatever you are trying to sell because everybody has a lot of information coming to them; and if you can reach them, somehow, two or three times via different sources over the course of some time, then they are going to say: ?Hey, there is something to this.?
Michael Z: Yes.
Michael C: ?Let me take a look at it.?
Michael Z: Exactly.
Michael C: Great point. All right. Back to Beer.com. Where did you get the eighty thousand dollars to buy that domain name to begin with?
Michael Z: That is a good question. So, I had been doing these infomercials fairly successfully. So, I had some money around, but at the same time I was bringing in this Beer Group ? this advertising niche agency who had the beer sponsors. So, they wound up putting up a significant portion of that eighty thousand dollars. To come into the deal, I was going to run it and ride shotgun, so it made sense that I was going to put in some cash to show I was serious, but the lion share of it came from those guys. And ultimately, they owned the biggest piece of it as well, so they were pretty excited.
Michael C: All right. So, a seven million dollar sale to Interbrew. You were not a majority stakeholder in Beer.com, but you were running the company and you had some stake in it.
Michael Z: Yeah. Yeah. I think I had about twenty-five percent of the company after I gave the kid a piece and gave the guys who were putting in the money and were bringing the advertisers to the same. And that always feels like a significant enough piece along with whatever other additional little tidbits you might be able to earn for yourself in the way of income and things like that.
Michael C: Sure. And so, did you have a partner on Beer.com in addition to the investor?
Michael Z: No.
Michael C: No. Andrew Miller?
Michael Z: No, the first deal that I did with Andy was Diamond.com. When I decided to make that acquisition, I went to Andy and said, ?Look, obviously you know what I just did with Beer.com. Here is what I am thinking of doing with Diamond.com. And it is a bit more money that I am going to have to put in here and I need somebody valued-added to the industry.? And in a couple of those places, he was a great fit for that. So, we did Diamond.com together and it was, obviously, a pretty good, quick success.
Michael C: Yeah. And I do not have it in my notes, Zappy. What was the end sale price of Diamond.com?
Michael Z: When we sold it, it was like a combined value of around seven million dollars. Pretty similar to Beer.com.
Michael C: Yeah.
Michael Z: Ours was cash in equity. A few years later after the Internet bubbled and they had burned through their capital and stuff, they wound up selling Diamond.com off for seven and a half million to the guys up in Canada Ice. And so, what was cool was you could see that the domain had retained its value. Even though the company had tanked, it was great to see that the domain was still holding value.
Michael C: Yeah, definitely. So, the key in both of those sales was not necessarily an operating business; a valuation based on a multiple of the earnings. It was, basically, you put up and running a website, you talked about what the vision could be, and then people looked what that potential growth could be, what it could cost in opportunity if they did not take advantage of it ? what their competitors might be able to do -, and you sold it based on that potential.
Michael Z: Yeah, absolutely. And I could have even left some money on the table after the fact; in knowing these guys, I had talked to them. And part of what they had told me afterwards was that they did not know if they would wind up making money on Beer.com, but they saw it as a way to market to beer lovers. And they have a broad portfolio, so Beer.com makes a lot of sense. And they said to me that a one percent shift in the beer drinking market ? if one percent of beer drinkers switch from one brand to another, that is a billion dollar swing.
Michael C: Wow.
Michael Z: So, who knows what it did for them or what the real value was, but I think at some point, again, you have to negotiate something that you can live with and something that, in that case, I was not so passionate about beer that I needed to be in that category for the next ten years.
Michael C: Now, beer is both singular and plural, but diamond is a singular versus diamonds ? the plural. Was that a concern to you when you were buying Diamond.com for three hundred thousand and thinking: ?Oh, did I buy the wrong one? Is this one going to be the category killer domain name??
Michael Z: Yeah, that is funny. It was an important variable. In my mind, there was a difference between Diamond.com and Diamonds.com in that I believe that two domains are different if one is singular and one is plural. So I was confident in that. The plural was owned by a company that was setting a lot of the prices. They were like the rap sheet. Rapaport had this rap sheet in New York that was calling prices on diamonds; they owned Diamonds.com. One of the reasons that I actually wound up doing the deal with Beny Steinmetz and these guys and having all this money behind me was I did see that there was a clash coming between us and Diamonds.com, and that Rapaport did have some money to fight that I would have had to fight the battle. So, a part of what my partners were taking on was that potential legal situation. It did come to a head and it was decided, as sort of domain precedent, that Diamonds.com was different than Diamond.com. They were two totally different things. Obviously we could not have pretended we were Rapaport or something like that, but if we were going to do our own thing, then we were two different companies in the eyes of the judges and people like that. So, it was important. It probably set a lot of precedent ? that Diamond-Diamonds situation.
Michael C: So, you did both of these deals. You gave twenty percent back to the company that sold you the deal. It seems like that is a nice maneuver. It is a nice-guy maneuver. It is a good karma business decision. You are trying to convince somebody: ?Hey, this is going to be big. I want to cut you in.? It is a good way to also bring down the price, but it makes the process much more complex because now you have another investor in the process. You have more people to potentially listen to and have to deal with. Why did you decide to do that ? give twenty percent to the people or companies that sold you that ? rather than just buy it outright?
Michael Z: Yeah, I mean I am a big believer in, if you share something, it is going to come back to you in some multiple. I mean I believe that fundamentally, so I want to have that happen in any business. I want to share, whether it is employees or people like that. But for a lot of the reasons that you just said ? intelligent reasons, like bringing the price down, get the deal, separate myself from somebody else who might be offering them one million and a half dollars or something for the domain -, that is a way to set it. But at the same time, with the Beer.com kid, I really felt like I was going to affect the value pretty substantially. I did not want this kid to come back to and say: ?Oh, you sophisticated marketer, you suckered me in; now I am going to sue you.? With the Diamond.com guys I did not feel quite the same, but in both of the cases I convinced them that I had some expertise ? some intellectual capital ? in doing this that they were going to be a passive investor ? passive shareholder ? and that they were going to own the stock, but I was going to do what I was going to do and they were going to have to except what I did and when I sold it. The only caveat was they were going to have some piece of that upside.
Michael C: Yeah, all right. And when you did the deal for Beer back in 1998, hosting was not very cheap back then, design work was not as cheap as it is today, legal work was probably cheaper back then. So, this eighty thousand dollars that you had some investment and that you put your own money on the line for was only the first step. You actually had to close the paperwork, get your lawyer at one hundred or two hundred dollars per hour to write that up, go back and forth on that, design it up, and host it. Do you know how much more you spend besides the eighty thousand dollars to get it up and running to the point where you could say here is my vision for it?
Michael Z: Yeah, we actually, between myself and the other party, threw ten thousand dollars into like an operating kitty; and it was enough. Again, it was a thin site. I do not want to claim there was a whole lot of depth to this site, but it was enough to reface the site; have the documentation real clean, which I think is important to domainers. If you are going to do something that you eventually think you are going to sell, do everything really clean. Spend the time to put together the LLC Operating Agreements. Do everything right. Lay out the distribution of capital. But it was definitely, since I sold it three or four months later, really had not spent that much money. We never spent the whole ten thousand we had put in there, but it was probably several thousand dollars went in. And the good news was if we had wanted to bring in some outside capital at that point, I think we could have presented to somebody. ?Hey, we have got some press. We have got a site. We got interest from some of these companies. Why don?t you come in now at five hundred thousand dollars or a million dollar valuation?? So, I think every time you move forward you have to worry a little bit less about what you gave away or how much capital you are going to need to take it to the next level.
Michael C: Right. All right. So, we talked about those two sites that you bought that you built sites for, marketed, and then sold not too much later. So you rolled out of Diamond.com with another seven million dollar sale; by this time, you are probably a multi-millionaire. Was there any thought that: ?Hey, I am done, man. I have got enough. I can go to Puerto Rico. I can live where I want and I am done.?
Michael Z: No, I mean, at that point, I had made a couple million dollars for myself and what not, and everything was looking great. But I was having a lot of fun. I knew this was a very early industry. I knew that the Internet, as I was seeing my friends using email and using America Online, was rolling. It would have been insane to just kind of stop right there and, quite frankly, that did not seem like a whole lot of money to me, especially even early on there. You started to get the sense that this was going to be pretty big and there may be some hundred million dollar sales and some billion-dollar sales. It was like I was interested in participating in that.
Michael C: So this was just a prelude you were looking at it. Was your next purchase for CreditCards.com?
Michael Z: No, the next purchase I did sort of simultaneous to Diamond.com while it was happening was I wound up buying Computer.com.
Michael C: Oh, yeah, that?s right. Let?s talk about the Computer.com one.
Michael Z: Yeah. And that was during the 1999/2000 total exuberance. You call up your dentist to get a cleaning appointment and he would say: ?Oh, I just started an Internet hedge fund.? You know what I mean? It was crazy. So, I really liked the domain. I thought to myself: ?Computers. Everybody is using the Internet on a computer. I have got this 1-800-COMPUTER phone number with it. This is really a big play.? And I got together with a guy named Mike Ford on this one; was my partner on this. And he came from the computer background and he is a sales guy. He sold to some of the big computer companies in the past. And told him what I wanted to do; he loved it. We came up with a price. It was five hundred thousand dollars and the owner was keeping something like twenty percent. A little bit less. And that was the deal. We went out and talked to our friends and family, and folks like that, and we wound up talking to Jeff Taylor. Mike Ford did at a Boston College Entrepreneurial Event. Jeff Taylor from Monster.com was speaking there. And so, after the event, he went up to him and said, ?Hey Jeff, we bought this 1-800-COMPUTER and Computer.com,? and Jeff was like: ?I love it.? He said, ?This sounds amazing.? He said, ?We are thinking about doing a Super Bowl ad, like you did last year,? and Jeff said, ?I think that would be a great thing.? He was carrying like a multi-billion dollar market cap after doing that. So, long story short, Jeff agreed to come on as an advisor, to come on as an investor, and chaperone us to do a Super Bowl commercial
Michael C: So, let me pause the story right there for a second, Zappy. If anybody is watching this show and they have not seen the Super Bowl commercial from January 30, 2000, they need to pause the video right now. They need to start a new tab in their browser, go to Zappy.com, and I believe it is in the upper right hand corner is the commercial. It is hilarious, so go ahead and pause the show, watch it, and then come back.
Michael Z: Yes. Welcome back. Yeah, it was a blast to do that. And it was an insane time, so we very quickly raised the money to do a Super Bowl commercial, which, at the time, that year was 2.7 million dollars.
Michael C: Wow.
Michael Z: You got a one 30-second commercial in the game and you got two commercials in the pre-game. So, we were the very last advertisers to buy a spot in the game. They were really already taken, but somebody like Pepsi or Budweiser had three or four spots, and so they sold one them to us. The network did. And the network said to us, ?Super Bowls have been lopsided events in the last few years, so a lot of people may tune out of the show, but you guys are getting the last commercial break in the game, which traditionally is not great, but there may be still a critical mass of people watching at that point. So, do you want to take a shot?? And we said, ?Absolutely. Sounds like, between that audience and the press that we can potentially get leading up to it, it is worth the risk.? So, we bought the commercial with Jeff chaperoning us, we worked with an ad agency out in New York, and we created this Super Bowl commercial; and Mike Ford and myself being total egomaniacs, we were like: ?But where is the spot that we are in? Like you have got Dave Thomas from Wendy?s. He is in his. And Michael Bell is in his spot. Like where is our spot?? So they were like: ?Oh yeah, yeah, we got that spot.? So, we did a spot that is kind of like a spoof on Woody Allen. It is an old Woody Allen movie, where they are talking to relatives of his and about himself and stuff. So these people were actors and actresses. They were not really our relatives.
Michael C: It was not really your family.
Michael Z: No. The idea was to do something. Our concept for Computer.com was computer stuff for the novice. So we felt like if we could give that novice message and the site had all kinds of information and stuff for novices, the phone number was backed by a computer reseller. And so, the plan was launch the Super Bowl, launch the site the same day as Super Bowl, which was obviously a technical thing that we needed to get right, and then launch the Super Bowl commercial. And so, it was total (Unclear 43:13.6) and faith, but as it turned out, we were the last spot in the game and it turned it out. It was the Rams v. Titans game, which, if you remember, came down to the very last play in the game, where the guy kind of reached out to kind of score the touchdown on the last play. So our commercial went off and it was prior to that play, but everybody hanging on the edge of their seat. I will never forget. It was one of the most surreal moments of my life. I was in the ABC Disney Box at the Super Bowl in Atlanta, and in the booth was Michael Eisner, and Joe Nameth, and John Travolta, and all these people. And the advertisers were there, so each time an ad would go off, everybody would like hug the advertiser or something, or go: ?Yeah, good commercial.? So, leading up to it, everybody kind of knew we were the last spot, was rooting for it to happen, and so they had to make a first down on a fourth down play, and they had a get out of bounds. All this crazy stuff had to happen for us to still be relevant.
Michael C: Right.
Michael Z: So, when the spot went off, the Head of Disney ? Iger, who is the Head today ? said to me: ?I don?t know if you have a horseshoe up your ass, but that was the highest rated commercial all (Unclear 44:36.8).
Michael C: And it went on to be declared by Adweek, which is one of the largest advertising publishing companies in the industry of advertising and marketing, to be one of the best Super Bowl commercials of all time.
Michael Z: Yeah, they loved it. I mean it was a lot of fun. The funny thing was, when you see the commercial, you see, at the end, my buddy, Mike Ford, who is my partner laughs. He lets out this like grunt.
Michael C: He lets out a snort.
Michael Z: Yeah, and it is so ridiculous. Like we were totally mocking the whole thing. I think they appreciated that. But what happened when the commercial went off was pretty incredible. We could see back at the servers and Jeff Taylor had made sure that we were not going to crash that, and we had all kinds of amazing technology in place, but we could see that within the first twenty-four hours ? while the Super Bowl commercial was happening we were starting to get flooded, and then after it flooded after the game ? we had one million people came to Computer.com within that period.
Michael C: Wow.
Michael Z: And so, after that experience, we went on to raise more money at a much higher valuation ? exactly what we had hoped would happen. And a couple months after that, if you recall, that is when the Internet completely melted down. And the Super Bowl commercial that we did really, I think, saved us because, by doing that commercial and being proactive, when everything melted down, we were showing people what we were doing and what our stats were. And our partner in the eCommerce store that was answering all the calls and taking all the orders online was a company called Siberian Outpost at the time. And when we showed everybody, you could see that when people came to Computer.com, because of the credibility of being Computer.com and then the education and information we were giving people, when they went into our store, they were buying ten percent of the time, which was five or ten times what Siberian Outpost was getting when they got traffic from CNET or AOL.
Michael C: Right.
Michael Z: So, we showed this to all the retailers and we had a deal set up that was millions of dollars in cash and equity in a publicly traded company worth one hundred million dollars plus. Just a great deal, but their stock was ticking down every day from like fourteen dollars to twelve to ten to eight to four. It was just melting. So, as that was happening, we shifted and started talking to some of the business-to-business companies that were in that space. And then they started. (Unclear 47:25.1) fell from like three hundred dollars a share to eight dollars a share in one day, and that whole segment disappeared. But one of the guys we were talking to said, ?Office Depot. Their online division. They are actually growing it. And I think you guys should talk to them.? So, long story short, we wound up doing a deal with Office Depot ? their online division. Sold them the domain, sold them the phone number, sold them the business, all the data that we had, and wound up being able to pay off our investor notes and get a small token amount of Office Depot stock. And quite frankly, if we had not done that Super Bowl ad and we would not have those metrics, it probably would have been next to worthless. And I think, again, I am trying to evangelize development for anybody who has got a good domain or category that they are passionate about, and I just think you have to be proactive because there are so many great things that come out of that development that you maybe cannot see in that moment, but that come back to help you.
Michael C: Definitely. So, did you walk away from the sale of Computer.com with break even; basically, taking the cash that you got and putting it towards the investment, and then walking away with stock that then became valuable?
Michael Z: No, it was a loss, but it was a partial loss as apposed to a complete loss, which, at that moment, was like a victory to people who were the note holders. People like Jeff Taylor and people who had given us investor notes. I mean they were happy to get their investment back that was not happening for them for most of the places they were invested.
Michael C: Definitely. So, the lesson from this. The very beginning of the show we talked about how we are going to learn the wins and the losses, or what you learned and what you unfortunately learned negatively during the experience; and I love that you brought up this story and I love that you are open with the fact that it was a loss because you had two, what sounds like, really easy wins with Beer.com and Diamond.com, but you show that the same game plan that you executed against those was used in this case and, if you would not have done that, yes, you would have ended up just like every other .COM startup in 2000 that started up in ?98 or ?99, and you would have walked away with nothing except for a domain name.
Michael Z: Yeah, absolutely. It is a learning curve. So, just to transition to the next domain that I wound up doing, which was CreditCards.com, a lot that I learned during that Computer.com experience affected my critical thinking. So, I thought to myself: ?What I did not like about the Computer.com experience ? the limitation there was, was a physical product.? And they always come out with a new computer, so the old stuff is no good, and there are all kinds of (Unclear 50.21.3). You have to be always on the cutting edge. So, I thought to myself after the Internet bubble burst. I thought: ?I want to go back to my Super bowl list of what categories I would buy, but I want the non-physical product ones. Those are the ones that I am going to go for now.? So, if you think about it, credit cars are non-physical. Mortgages. Insurance.? Those are like non-physical products that were on the list. So, I thought about credit cards and I thought: ?Wow, what a great category. I am using my credit cards like crazy. I would love to be on the other end of that food chain.? And I thought: ?There is no product. It is just a promise between you and a credit card company to pay. That is amazing.? So, I approached the owners of CreditCards.com and, like a lot of people, they were, post-Internet bubble, throwing the baby out with the bathwater. They said, ?Oh, we have this great business doing backend credit card processing,? which they did. And they said, ?CreditCards.com. It is a little too .COMy. Like we do not need it. Take it,? and I was like: ?Okay.?
Michael C: Wow.
Michael Z: So, bought it for one hundred thousand dollars, which I had budgeted way more than that to buy it. But again, they just wanted to distance themselves.
Michael C: Let me pause the story there, Zappy. One hundred thousand dollars back in 2003?
Michael Z: 2001.
Michael C: 2001. Okay. 2001. So it was right after the .COM bust. They did not want it, but clearly it still had value. A six-figure domain name. Tell me about the negotiation process. Do you remember that because all of these are great domains, but I think a lot of domain investors that are watching this right now would say: ?CreditCards.com? That is like the holy grail for making money online??
Michael Z: Yes.
Michael C: What was the negotiation process? Did you make an offer to them? Did they say: ?Well, I think it should be about two hundred??
Michael Z: It is funny. All of these things, as you learn, as you know, they all have these all crazy situations involved with them. And, as I remember it ? I am just remembering it right now -, something happened, where I had been willing to pay substantially more, but I said, ?What do you want? You are not going to develop it. You are going your way anyways,? and they wound up having a very successful IPO for their backend credit card company. So, they really did not need it. I mean they should have kept it, but they did not need it. And they had originally said something like two hundred thousand; and while that was happening, there was some kind of an Internet scandal, where Russian hackers had stolen people?s identities and things like that related to credit cards. And they just called me up and they were like: ?You know what? If you do one hundred thousand, we will just do it together.? And I was like: ?Okay.? Like who calls you up and gives you fifty percent off? But it was just the nature of that moment for them. And so, we very quickly did the deal. Andy Miller was my partner on this. Jeff Taylor, who was in Computer.com, came in as an investor, and I said, ?Let?s do this in a similar fashion of what I have been doing, but this seems like the holy grail, so let?s spend a few years trying to get good at search engine optimization and affiliate marketing. Let?s try to maybe build this into something real.? But at the same time, Michael, there were a lot of people that I talked at that time who thought Internet is over. (Unclear 54:05.9).
Michael C: Yeah, sure, there were the nay-sayers that thought you were crazy at that time for spending one hundred thousand dollars.
Michael Z: Yeah, and the fact that they were not being approached by other people to buy it. Again, you got to be proactive because I think there is a lot in that proactivity that comes out of there.
Michael C: Yeah, definitely. So, you strike me as a pretty personable guy, Zappy, and we have not spoken before today. But you are a likable guy. You are a clear communicator. I think you are a good person. How much of the relationship aspect comes into play when you are negotiating for Beer.com, or Diamond.com, or CreditCards.com? At the point where the sellers of CreditCards.com called you up and said, ?Hey, give us one hundred thousand dollars and it is your,? did you have a long standing relationship by telephone with them? Did you meet with them? What was that relationship like?
Michael Z: Yeah, I knew one of the people over there originally, which is how I got really synced into talking to the Senior Management. I went and met with them because I thought it was important. I thought it would elevate the relationship. I still think, again, face-to-face communication is the best; second is what you and I are doing, which feels almost like that; third would be the telephone. And just coming back to what you said, I am sure there are plenty of people that do not think I am a good guy that think I am an opportunist or whatever they think. So, my philosophy has always been there is some percentage of people who are going to like you for who you are, there is another group of people who, if you said all the right things, would like you, and there is a whole group of people who are never going to like you no matter what you do. You cure cancer. You save the planet. They could care less. They do not like you. And I think just to try to focus on being who you are and trying to communicate clearly, you are going to have your haters and you are going to have that anyway, so do not focus there. But I think that is a good point. If you develop a relationship with a domain seller who you are working with or somebody you are trying to sell your thing to, it is just another part of the equation that you can leverage into maybe getting a better price. I have had circumstances where I have wanted to buy a domain name and somebody stepped in last minute with a bunch more money and I was still able to get the deal because the person felt like they did not want to go back on their word or their relationship, or they valued the relationship with me going forward. So, they did not just take the highest bidder.
Michael C: Yeah. Yeah, I have heard of that case happening in real estate ? in physical real estate ? a lot. And when we actually moved to the Seattle area, we found this beautiful home overlooking Seattle. And it was older, but the view, you just cannot get that kind of view every day. And so, we started to form a relationship with the sellers who we knew were going to retire in a couple of years and probably move some place closer to their kids. And we wanted to have that relationship with them so we could be on the inside track; and maybe, if somebody else put up the exact same offer as us, they would pick us because they knew us.
Michael Z: Yeah.
Michael C: Maybe.
Michael Z: It is a good point. It is an important point for domainers because I do think a lot of this comes down to relationship and, in this case, a lot of the folks that took domains early on ? the beauty of it is that they are not maybe marketers or developers, or even business people. They are just intelligent, savvy people who have an asset. And for you to be able to build a relationship there, I think it could go a really long way. There is always this moment at the very end when they are about to sell you the domain name where they just go: ?You know what? Before I sell this, maybe I will just send an email to everybody in my email box that I am selling it just in case.? And of course people come out of the woodwork, and want to pay more, and want to disrupt you from getting it or something. So, having that relationship, whether it is by phone or in person, I think that is a great thing to have if you can develop it.
Michael C: Yeah. So, I think this is a fantastic interview so far, Zappy. I love to hear all these details. I have a ton more questions to ask you, so let me just finish up the CreditCards.com story. You bought it in 2001. One hundred thousand dollars. You actually created the website. You did not just create a ?mini-site? of what it would be and then market it and sell it to the highest bidder. You actually created a functioning website. Is that correct?
Michael Z: Yes, definitely. So, with a couple of people in Boston ? a real small team -, we just set out to make a search engine for credit cards. It was not really deep. I do not want to claim it was as complex as somebody might think it was. It was: What Credit Card is Right For You, Good Credit, Bad Credit, Airline Miles, What Do You Want, and then we would show you the top credit cards for those different categories. And you click on one; if you fill out a form, the credit card company would pay us. And originally we started out doing that through Commission Junction and just getting paid. And at a certain point, where we got enough confidence, we started to contact the credit card companies directly to try to make direct deals. And I want to make this point. This is like the power of the generic domain. You can literally get anybody on the phone when you are the domain category and you start calling around. So, we were able to get Sandy Weill from CitiBank on the phone.
Michael C: Wow.
Michael Z: Left a message: ?CreditCards.com calling.? He comes to the phone. We talk. We said, ?We want to have a direct relationship.? He said, ?Oh, okay. Great. It makes sense. I will connect you with my head guy there.? And of course, when the CEO is calling the head guy, you are going to make a deal. So, we were able to make some direct deals and that increased some of the bounties we were getting. And we were learning as we went on search engine optimization and affiliate marketing; and about three years into the process, it was going well. We were making money every month and distributing it out, and it was going really nicely. But a guy came to us three years in, and he was from Texas, and he had a company called Click Success and he said, ?Look, I am doing really well with financial lead generation. If I were CreditCards.com I would be doing incredibly well and I would like to figure out a way to work with you guys.? And this is like the classic fish that got away story for me, where we continued to talk it through and negotiate with him. And the internal group, who maybe had not had some of the sales that I had had maybe wanted an exit that was post the Internet bubble, said, ?Hey, let?s sell CreditCards.com for cash. Let?s take the money and diversify into a bunch of domain names,? which sounded pretty good too. So we wound up making a deal with this guy to sell it to him for 2.75 million dollars, which, again ? you buy something for one hundred thousand dollars, make money for three years, sell it for 2.75 -, is not the worst thing in the world.
Michael C: Yeah.
Michael Z: We sold it to him. He immediately took the natural traffic that we had, he took the credibility, and he started to buy traffic in the paid search. We were doing all SEO for the most part and haggling a little bit. He started to go heavy at what he knew, which was paid search. He very quickly increased the number of cards he was doing each month; went back to the banks and said, ?Hey, instead of fifty bucks a card, I want one hundred bucks,? they said no problem, and, long story short, two years to the month that we sold it to him for 2.75 million, he sold it to American Capital for 133 million and he kept some stock in the company too. And the painful thing is that it is the same logo, it is the same website, and it is the same business model. Nothing changed. It is the exact same thing. It is just he leveraged in the next evolution of Internet marketing, and so that was obviously a lesson. Every night when I am watching TV, at some point, CreditCards.com commercial comes on. You want to jump out the window, but at the same time, I took the money, diversified into some great domains, and have all kinds of amazing domain situations and companies that have developed and flourished from that. So, again, you got to put your blinders on and move forward.
Michael C: Yeah. So, on your first two deals, you actually left a portion of the company with the person that you bought the domains from ? Beer.com and Diamond.com. Did you think about, when you were selling CreditCards.com to this guy: ?Hey, let me keep ten percent of it or twenty percent of it so I got some portion of upside??
Michael Z: Yeah, it was back and forth, and there was definitely that deal was on the table as well. But from my group?s standpoint and, again, when you have investors and partners and things, you have to be willing to go with some of what works for them. And the consensus was that we should sell it and take the cash and diversify into a broader portfolio. Maybe try to create the next IAC or something like that with (Unclear 1:03:54.4) domains.
Michael C: Right. Yeah, everything is 20-20, right? 20-20 hindsight because cash is king when you get a deal. I would rather have cash in the bank today because you do not k
Source: http://www.domainsherpa.com/michael-zappy-zapolin-interview/
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