Forget Paper Millionaire, Digg Founder's A Vapormillionaire

from the bet-this-story-won't-get-dugg dept

We’ve become very accustomed to stories about how this or that startup could be worth $x billion, though they typically offer little justification for that price tag. At least, however, they typically acknowledge that the price is speculative, and that a buyout is far from a done deal. BusinessWeek has decided to go a step further, with a cover story on Digg, and the title “How This Kid Made $60 million in 18 Months” (referring to Digg founder Kevin Rose). Forget any buyout, for BusinessWeek, it’s already a done deal: “So far, Digg is breaking even on an estimated $3 million annually in revenues. Nonetheless, people in the know say Digg is easily worth $200 million.” Of course, the article doesn’t identify these “people in the know” who figure that a profit-less site is worth 60x revenue. It also never explains how Kevin Rose made $60 million (probably because he didn’t actually make that money), though we’re guessing that they calculated his share of that $200 million, based on his stake in the company. Still, you’d think they wouldn’t ask their readers to guess about how they arrived at $60 million, since they saw fit to put that number on the cover.

And if all this sounds just a little bit dot-com-ish, BusinessWeek is prepared with a response: “It’s not as dot-com deja vu as it sounds. YouTube, the enormously popular video site, posts similarly fledgling revenues, but some experts say it could easily fetch $500 million.” Actually, such relative thinking should give anyone a bad case of dot-com deja vu. And there’s lot more of it too. At one point it suggests that Digg could become a cash cow like MySpace, a site that’s had problems monetizing its enormous base. As for MySpace, it insists that Rupert Murdoch got a steal because Facebook turned down a $600 million buyout offer. Yes, we fail to see the logic in that argument too. Okay, we’ll spare you any more. Suffice to say, BusinessWeek has written the ultimate Web2.0 hype piece without the slightest hint of skepticism about the numbers that it throws around. Digg very well may be sold at some point, and Kevin and the other Digg staff may make out very well. However, to suggest that they already have is pure bubble logic. Yeah, we’ve got some serious deja vu.

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Comments on “Forget Paper Millionaire, Digg Founder's A Vapormillionaire”

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JoJo says:

All they’re trying to do is bring investors back into trust mode. Sure, it’s sketchy, but theoretically it could pan out if a buyout offer ever came up.

I would like to know if there’s ever been an example of a company that paid “x” millions of dollars for a web site, that actually made that money back on it.

Oh, and 2nd.

steve says:

Re: Re:

Very true. The way to make money in the bubble is sell out to suckers that cant develop their own ideas or tech. It will happen again…and again…Digg is cute but not that unique and everyone is now jumping on the band wagon. Hell google news has been using similar but better tech to gather the most published news stories. Also I go to digg to see odd stuff not hard news. look at the three stories in the sports section. that tells you there are way to many geeks digging. Do I want my news sifted by geeks or news peeps that are either pro or enti insrael or pro or anti Bush etc. All “news” is filtered. Plus my concern as with youtube is that it will just become an outlet for fake news to push some product or service.

Another genius on the 'Net says:

Lies everywhere you turn, and people wonder why violent crime rates are rising so rapidly. Can’t even trust a magazine to serve it’s purpose. What are the writers doing over there? Just rushing to put together Word documents that read well with no thought on the factuality? Do they get to go home early after writing up junk?

When the magazines for doctors start pulling this lazy schanigans, progress will be undermined in health industry.

TJGeezer says:

Re: Another genius on the 'Net

“Lies everywhere you turn, and people wonder why violent crime rates are rising so rapidly.” Wow – so that’s the reason for rising Urban violent crime rates in a torn-apart culture where the poor are getting ever poorer. It’s BusinessWeek’s fault! Thanks for clearing that up.

Another genius on the 'Net says:

I want to write for Business Week. I am great at typing words that somewhat make sense and I have little patience to research for stories. I can turn on radio or television and imagine my own reality to share with your customers. Besides, what do investors and businessmen know besides hiring others to do their dirty work?

Vasco DaGameboy says:

Here we go again...

Remember when even domain names were going for insane prices, like for $1 million and for $8 million? (visit each of those to see what that money bought, btw) That was another batch of business “experts” who just knew that all it took was an easily recognizable domain to bring the visitors and their dollars in droves.

If Kevin Rose has accomplished anything, it is capturing the attention of a significant number of Gen X & Yers for the moment. Not an easy feat, to be sure, but neither is it guaranteed to be enduring, and if some “expert” comes along and dumps 60 mil on him for a site that’s as much about the community as its content, then I have to once again question the meaning of the word expert.

librarypunk says:

It scares me to see MySpace and Digg in the same piece. While Digg actually contributes to intellectual discourse and has built an honest-to-god community, MySpace is just an old media man’s over-hyped playground for pre-teens and college kids that will fall flat on its face when its users finally grow up. I hope people don’t believe the same thing about Digg, nevermind whether Kevin and Co. decide to sell out.

Vasco DaGameboy says:

Agreed, but...

theres been quite a few sites selling for a fair amount of money, obviously they usually have a bit of “substance” but for example, New Zealand sold for 700million (NZD) which for a 27 yrold kiwi guy who dropped outa uni and started an auction site aint to bad.

Agreed, but not a single internet property (except eBay and maybe Google) is based on sound business principles that have been tried and tested for years. eBay actually generates revenue and offers a unique service, but everyone else is just another billboard, depending on ad revenues for support.

Kudos to a 27 year old dropout who had a good idea and convinced a bunch of money men to pony up a small fortune for it, but that doesn’t qualify him as a business genius (and the same goes for Digg etc). Almost all these success stories are a combination of high expectations, unsubstantiated valuations, and good timing.

Just remember, there are a helluva lot more Kozmos and Boos out there than eBays and Googles, and the dot com graveyard is still full of fresh corpses.

cwk says:

Re: Agreed, but...

“everyone else is just another billboard, depending on ad revenues for support.”

That statement describes also every TV network, newspaper, and radio station in existence. Professional sports as we know them would not exist without ad revenues.

Annual advertising revenue globally is in the trillion dollar ballpark, and comparatively speaking, Internet content is cheaper to produce and delivers a much more targeted audience, i.e., it is superior. Over time, Internet advertising should not only become much more widespread, but also more expensive or profitable depending on who you are.

People yack about YouTube spending $1m a month on bandwidth to reach what, tens of millions of people a day, for a whole month? That’s what Jennifer Aniston got paid to flip her hair around for one 30-minute episode of Friends that was ultimately seen by a lot fewer people.

The problem with Kozmo, Boo, is that they sold an unexecuted idea. YouTube, Digg, even stupid MySpace has at least proven they can attract large audiences. Granted this is like saying they proved they can finish the first lap of the Indy 500. But keep in mind that virtually no one gets even that far.

nhansen says:

takeovers and buyouts

I’ve said it on digg, and i’ll pitch it here too:

These over priced buyouts and take overs are not about the websites, the technology, or even the “community.” It’s about a bigger company wanting to acquire a list of media consumers that they can market to. Remember Ebay’s bid for Skype? That wasn’t so ebay could get in to voip business…that was a bid for 4 million consumer names and details from around the world…priceless in their eyes.

Anonymous Coward says:

“That statement describes also every TV network, newspaper, and radio station in existence. Professional sports as we know them would not exist without ad revenues. ”

No doubt, but how many local radio stations have a market capitalization of $1 billion? There are TV stations, newspapers, even large radio stations in the US that generate ad revenues that would make most dot coms drool.

The bottom line is that there is nothing new here, and has no real edge over established media, yet industry experts continue to act as if these are new ways of doing business. In reality, it’s not much different than CBS printing ads on eggs…it just reaches a wider audience.

I still say that Digg, Myspace, facebook, etc. are all faddish by nature, and while they may command several million hits this year, next year there will be another Gen Y fad that turns the heads of everyone under 30. As such, what’s speculatively worth $60 million today will not be worth more than a few thousand in 3 years.

Sean (user link) says:

How much would it be worth in Google's hands?

That price tag sounds way over the top when compared to revenue, but it’s possible that Digg is worth that amount to the right people because they can better unlock its potential. I can see search engines being pretty keen to acquire Digg because it gives them a human-edited directory of what’s hot (the same reason Yahoo snapped up delicious and Looksmart got furl), with all the community already built-in. I don’t know how much it would cost to create a replacement for Digg, but it wouldn’t be cheap. $200m might make business sense as part of a bigger portfolio for a search engine company. Though probably not Google, who tend to like to build stuff or buy it cheap.

casey kochmer (user link) says:

magic :)

In the Personal Tao I write:

Science is fact

Religion is faith

Magic is perception

Know these boundaries to discover what lies beyond.

Well, its all about perception isn’t it???

We are creating a culture of magic in these bubbles of fake cash. When you read these stories of all the cash it just kicks one in the guts at first. I mean who wouldn’t want to be part of this? Thats why the bubble forms. I think wow, I could have done that easily. But seriously in the end, it’s just magic and what really matters is what you make it to be. Digg is a fun resource, so kewl and more power to the surf Kevin Rose can kick up and ride. 🙂 He truly did make his own magic in that!

Lay Person says:

Yeah but...

Yeah, I see your point Joe but Digg may make it also.

The numbers speak for themselves. As far as the article goes, his ratings are high and the model sounds pretty good.

Whether it’s a passing novelty like all other failed sites or it has a lasting patronage, it’s hard to say right now.

I’m still not sure why your bagging this Rose guy. Maybe your bagging Newsweek for the story…just not clear what the matter is.

JJ says:

Re: Yeah but...

Lay Person,

> Yeah, I see your point Joe but Digg may make it also.

As Joe says in his post. The post is about BusinessWeek, not Digg…

> The numbers speak for themselves. As far as the article goes, his ratings are high and the model sounds pretty good.

The numbers do speak for itself. They’re making a very small amount of money. Don’t buy the Alexa traffic numbers. They’re easily gamed.

> Whether it’s a passing novelty like all other failed sites or it has a lasting patronage, it’s hard to say right now.

Uh. Yeah, but Joe didn’t say one way or the other.

> I’m still not sure why your bagging this Rose guy. Maybe your bagging Newsweek for the story…just not clear what the matter is.

Read the post again.

He’s not bagging on Rose. He’s just pointing out that Business Week’s article is totally bogus. That’s separate from the quality of Digg. BW says he made $60 million. He hasn’t. That’s factually incorrect. BW claims the company is worth some figure that no one actually knows what it’s worth until it’s sold. It’s pure hype, and it’s bad for the industry.

RG Hubbard says:

Recents Studies Show...

That students in secondary and post-secondary education courses don’t have the cognitive ability to discern between two opposing arguments presented in a standard newspaper article. Note, please, that newspaper articles are STILL geared to a fourth-grader’s reading level.

That study (and I’m not a big fan of studies, in general) apparently applies to Internet readers as well. For instance, most of the people who came here by way of Digg seem to think a site they like is being attacked. They and many other posters don’t seem to have any idea of what the post they are criticising is actually about.

That’s sad – very sad. To the rest of the posters and readers – kudos on having more than ‘testing’ smarts.

Ricky Ross says:

Sell now!

This is Bubble 2.0 and guys like Kevin Rose should sell why they still have the opportunity. Unlike the first bubble, IPO is not an option for most of these companies so the acquisition route is what’s fueling the market. A lot hinges on the success of existing acquisitions. News Corp. needs to monetize MySpace fairly quickly and show its shareholders a ROI on the massive investment. XFire needs to generate a nice return for Viacom (who reportedly paid 10x revenues for it). Etc. etc.

Remember, if somebody buys Digg for $200 million, it has to make $200 million for them just to break even. That’s no small task given current revenues are only $3 million. If the major media companies who represent the only viable exit strategy for most of these companies start to see evidence that paying massive amounts for hugely popular startups cannot be justified to shareholders, this market dies. If the “case studies” like MySpace validate the fact that there’s no way to generate a return for shareholders within a reasonable amount of time when you pay a significant premium, this market dies.

TechCrunch today reported that delicious, purchased by Yahoo, is in decline and may be “tanking” depending on your viewpoint, highlighting the inherent risk to big companies that spend big bucks to acquire startups in markets which have little barrier to entry. There is no “new economy” – companies can’t live on hype forever, they need to generate massive profits if they want to be massive businesses.

The lack of any major acquisitions lately (on the size of MySpace), despite the fact that Facebook and Bebo have thrown around huge numbers, should serve as a warning. AOL just launched its own video service instead of buying a service like YouTube. I think this may be an indicator that they recognize that there’s much less risk to shareholders by developing their own services in-house. Again, the barriers to entry in most of the Web 2.0 markets is almost non-existant. What drives the high valuations is popularity and userbase, but if those can’t be monetized, and the userbases are highly fickle, they’re practically worthless.

The signs are showing and I think they’re saying to these companies that it’s better to get out while you can make money because the market is not going to be pretty when it collapses. The fact that lots of people are talking about Bubble 2.0 is not a good sign.

If I were a major media exec, I would not acquire any of the popular startups at these outrageous valuations. Instead, I would wait for the bubble to burst and then acquire them in the firesales likely to ensue. Alternatively, they can develop competing services in-house and simply wait for the startups to fail, which they will certainly do if they can’t monetize and their only exit strategy (acquisition) is no longer viable. The article is wrong – guys like Kevin Rose are not in control. The companies that are potential acquirers are in control and if they recognize the power they wield over these startups, they will make out very well.

Mr. Shiney (user link) says:

Can you blame someone for riding the gravy train?

Digg is certainly a phenomenon (and my preferred source of technews). Whether it is worth 200M or not remains to be seen — yet I suspect it wouldn’t be too hard to find a buyer, should they want to sell. Why would someone pay 60 times earnings for the company? Because they hope it’s the next Yahoo.

I question how Digg “breaks even” on 3M revenue. What are their costs, anyway? The site was started with a $700 investment. How did that cost grow to $3M?

Mr. Shiney’s Blog!

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