Monday, July 16, 2012

Lessons from Digg's Collapse...

On Friday, the once-preeminent social media giant, Digg, was sold for a sum total of $500,000. Maybe this would seem like a success to the aspiring lone individual launching a website from his basement, but Digg received approximately $45 million in venture capital funding, and was once infamously valued at $160 MILLION, landing its founder, Kevin Rose, on the cover of BusinessWeek magazine.

All things considered, it's safe to say Digg became a bust of epic proportions.

So what went wrong? How did the one-time clear leader in social news media lose its footing, lose its audience, and ultimately lose almost all of its value? Furthermore, what lessons can we draw about Digg's failure for future dot-com startups?

  1. Web startups still have no idea how to make money.

    It's been over a decade since the dot-com bust of the late 90s, and yet despite how we all laugh at the overvaluations of websites like Pets.com and Webvan, their basic problem still persists... How are they going to make money??? Then and now, websites launch with an initial idea, attract venture capital and angel investors, then spend all their efforts at attracting a large audience. That's pretty much the entire business model. As for generating revenue and actually turning a profit, the mentality of "Build your audience and brand first and we'll figure out the money-side later" still persists.

  2. Investors still don't care.

    The free market and rational-choice theory suggests that the more dot-coms fail to ever make money, the less investors will be inclined to invest in them. Clearly, that makes too much sense to coincide with reality. Investors continue to throw millions into dot-coms with no proven revenue-generating business plan, even in these tough economic times. Why? Apparently, for every exception-to-the-rule monster success story like Google, investors are eager to overlook every dot-com business plan's fatal flaw and keep going all googly-eyed (pun intended) for the miniscule, lottery-style chance of hitting it big.

    Really, other than Google, can you think of almost any other prominent pure Internet-play that's proven it can consistently turn a profit? Even Facebook raises doubts on that front.

    If it weren't for the fact that it's extremely trendy among millionaire investors and makes them feel hip and cool to talk about their e-businesses at cocktail parties, the funding for such financial black holes would dry up pretty quickly. But if the market for such dot-coms still persists, nothing's going to change. The investors are creating that market for these type of businesses, for better or worse.

  3. When your website is valued at several hundred million dollars, SELL, SELL, SELL!!!

    Mark Zuckerberg notwithstanding, Digg is only the latest cautionary tale of websites that at their peak were valued astronomically high, only to soon come crashing down. Capitalism is all about growing your business, and I'm definitely not suggesting entrepreneurs sell to the first bidder (or start a business solely to cash out at first opportunity). However, whatever your dreams of growing your business to epic proportions might be, once you're reached the $160 million mark, I've got news for you - You've made it. There's really not that much further for you to go especially considering that you don't make any money. At the very least, cash out enough to payout your original angel investors. You might need them to remember you fondly and with a sense of appreciation down the road.

  4. It's sad.

    Not to be lost in all this, Digg was actually a great website! For the everyday user, the idea that we could be made of aware of certain news stories based not on the decisions of elite editors acting as parochial gatekeepers, but based on decisions made by The People, wasn't only a democratizing idea in theory, it was something lots of us enjoyed. You felt more in touch with the cultural zeitgeist than you ever did reading the New York Times (again, for better or worse). Plus, for independent web publishers, Digg was often a boon for generating thousands of additional traffic hits - for example, this Nerfherder post about Ron Paul being censored in 2007 garnered 124 Diggs and over 12,000 page hits.

    If you overlook for a second the idea of Digg-the-business, and just focus on Digg-the-website, it's failure is pretty sad.

  5. Resources matter.

    Finally, taking all of the above into account, the greatest lesson of Digg's collapse is that resources still matter in a big way. Digg was a great idea for a website and, as a result, found its immensely large audience. If we end the story right there, that's an instructive lesson on its own. Websites based on truly novel and innovative ideas still are, and will always remain, popular. But if all you're looking to do is influence the culture and grow a popular website (overlooking the business component), your site can only grow insofar as you have the servers, the code, and the staff to support the growing technical demands that accompany growing popularity. That's the paradox... popular websites are more likely to have staying power when they don't have to adjust to the financial interests of investors, yet without at least some significant financial resources backing them, the website probably can't become very popular in the first place.

We can chicken-and-egg this paradox to death, but in the meantime, it may be worth noting how Craigslist continues to be the exception to every rule - requiring minimal resources to operate the site and consistently churning out gigantic profits. When it's all said and done, Craigslist, even more than corporate dot-com behemoths like Google and Facebook, may be the definitive example of Internet exceptionalism in our time.

  

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