Desperate Days for Digg
Posted on December 18, 2007
Filed Under Web 2.0 Kool Aid |
Web 2.0 darling Digg has reportedly retained investment bank Allen & Company to find a buyer. Asking price? A cool $300 million. As noted at Mashable, nearly all of the obvious potential buyers have reportedly expressed little to no interest in Kevin Rose’s baby previously and despite the Christmas spirit, nobody seems generous enough to make Kevin a $60 million kid (idiot editors at BusinessWeek notwithstanding).
While the retention of an investment bank by a company is not necessarily a desperate sign in and of itself, this sort of thing does not bode well for a “hot” startup. After all, “hot” startups should have buyers knocking on their doors - not the other way around. Any investment bank involvement in the sale of a coveted startup should be to negotiate a better deal, explore interest from third parties who might be willing to offer more, etc. In the case of Digg, however, it appears that Allen & Company will be tasked with trying to generate interest in Digg’s sale altogether. As such, saying that Digg is desperate is not an exaggeration.
I think Digg’s difficulty in finding a buyer demonstrates several things:
- Valuation is everything. Digg’s rumored revenues do not support a $300 million valuation in a sane world. I really hope that the people behind the $300 million asking price are smoking something deliciously sticky as the “wisdom of the crowd” doesn’t seem to be in agreement with this number.
- Cheap VC money can come back to bite you in the ass. Digg has taken a fairly substantial amount of venture capital funding on what were rumored to be generous valuations. Killer valuations are great until they realistically exceed what you’re going to be able to get somebody with hard cash to pay you for your company. In the case of Digg, it appears probable that a ridiculous valuation is needed for Digg’s investors to walk away with an acceptable return.
- Selling a company is easier when you have a business. Digg’s ability to monetize effectively is not well-established and a scalable, profitable business model has never become evident. As such, Digg really doesn’t have what looks to be a viable long-term business that’s worth hundreds of millions of dollars. It’s merely a “hot” company with no real place to go.
- Defensible technology is worth its weight in gold. Digg has none, which has opened the doors for a slew of competitors, including Reddit (which was bought for a lot less than Digg is asking) and Mixx (which the LA Times invested in).
- Community can be an asset and a liability. The users that have made Digg what it is have shown in the past that they are in control. Somehow I doubt they’d readily welcome new corporate overlords.
All this said, I can’t predict that Digg won’t sell for an exorbitant amount. After all, a sucker is born every minute and if anybody can find one, it’s an investment banker in Manhattan.
In terms of what Digg’s desperate search for a buyer means for Web 2.0, I will reserve judgment. I do, however, think that Donna Bogatin when she notes just how much hype has surrounded a startup that was supposed to change the business of news and could, we were told, even put some of the news business out of business. Instead of disintermediating the New York Times, however, as some predicted, it appears that Allen & Company will probably be calling the New York Times asking if it has an extra $300 million lying around. Irony 2.0, anyone?
More than anything, I’d simply be interested in knowing how Kevin Rose and Jay Adelson react to this news. I’m assuming they haven’t heard any of it yet because they’re so busy with their other startups.
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Drama 2.0 spikes the Web 2.0 kool aid by providing critical analyses of Web 2.0, its people, its startups and its impact on the world of media. Other topics are explored when Drama 2.0 has been drinking too much 1975 Dom Perignon. Read more about the Internet's version of Keyser Söze here.
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Digg users are notoriously anti-establishment and are fiercely loyal to the open source and anti-copyright movements. When they don’t get their way or feel as though they’ve been wronged, they take over the site as is the case with the DVD unlocking code fiasco.
They haven’t yet figured out how to monetize their hordes of traffic, mainly because it’s difficult to target ads to young, geeky, males who hate advertising on the web. They can’t even sell out a fraction of their current ad impressions, as on nearly every other pageview I’m greeted with shitty CPC text ads or generic Microsoft/MSN ads that are obviously fillers.
The problem with having a venture-backed company (especially with high valuations from its investors) is that they’re in need of a big exit. Digg has nearly 40 full-time employees but there’s no way they actually need that many. If they were self-funded they could fire half their workforce (or more) and run lean, work with the ads they’ve got, and turn into a reasonably profitable company. Unfortunately the “make enough revenues to pay our bills” model doesn’t apply since their investors are looking for the big payout, so now they’re forced to shop around since the founders have moved on to new ventures.
I’d say Digg is worth $50 million at best, and that’s only if the purchaser had some seriously good ideas about how to monetize their fickle and anarchist audience.
“They haven’t yet figured out how to monetize their hordes of traffic, mainly because it’s difficult to target ads to young, geeky, males who hate advertising on the web.”
Someone over there might want to give an ad discount to Playboy magazine!
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