I was telling a friend this week that 2008 was a good year because Web entrepreneurs and employees began to finally get some perspective on expectations, valuations, and common sense (let’s hope this time it sinks in and lasts, because clearly, we did not learn from the 1998-2000 era). But the truth is, I think the writers and journalists that cover these companies are partly to blame, too.
Judging from this article in Business Week, I don’t think it will last, though.
A year ago there were reports that Digg had hired investment bank Allen & Co. to put the popular news aggregation Web site on the block with an asking price of $300 million. Bloggers predicted that buyers could “easily justify” the price given Digg’s popularity, although no deal was ever consummated. Now that number looks like a relic from a bygone era. On Sept. 24, Highland Capital Partners and three other venture capital firms invested $28.7 million in Digg. The specific terms were not disclosed, but that investment implied a valuation of $167 million for the startup, according to one person who has seen the terms of the agreement. Digg executives declined to comment on the company’s valuation.
(…)
Digg’s public profile is much larger than its financial might. Last year the company lost $2.8 million on $4.8 million in revenue, according to Digg financial statements reviewed by BusinessWeek. In the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue. Adelson declined to comment on the figures.
NO TURNAROUND IN SIGHT
The valuations of tech startups are apt to keep falling, say some investors and lawyers. In September 18% of the financing rounds for venture-backed startups were for a lower value than the previous round, according to a survey from law firm Fenwick & West. In the fourth quarter that figure “could easily double,” says Fenwick & West attorney Barry Kramer.
In one extreme case, the software startup BitTorrent recently tore up an agreement signed earlier this year that would have given it $17 million in venture money. Instead, the company took $7 million, laid off two-thirds of its 60 employees, and slashed its valuation from $177 million to just $35 million.
Call me old fashioned, but I think that while Digg is an amazing property and service, a valuation of “even” $100M is quite good if it has financials in the order of magnitude that listed above, no? I mean, why should Kevin Rose and Jay Adelson feel bad about boasting such a valuation? Who says that$300M was realistic, let alone possible (or sane). I had previously harshly pointed out: would you buy Digg for $8.5M (when it had in fact raised $8.5M in financing on what was possibly an unreaslitic and unsustainable valuation round). For the record, yes, I would buy Digg for $8.5M. $85M? Not sure, even though Digg is definitely one of the most explosive web startups, ever. The problem has to do with social media, which is as monetizable via advertising as a Girls Gone Wild-themed video site would be… not that there is anything wrong with that, of course.
Sure, the earlier VC rounds that Digg did pushed the paper value to unsustainable and unrealistic levels - as did that Business Week cover (hmm… odd to see this story in BW, as well) - but I think it would be good for the people covering Silicon Valley to have a piece of humble pie, too… and get with the program: running a business is hard work, and building a $10M company is the exception, not the rule… let alone a $100M company.
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