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Social news site Digg was once one of the most popular services on the internet. An early social media darling, Digg and its founder, Kevin Rose, were the subject of numerous high-profile articles, including an embarrassing (and not-entirely-accurate) BusinessWeek cover piece with the headline How This Kid Made $60 Million In 18 Months.

It wasn't just the media lavishing attention on Digg: investors poured big money -- some $45m in total -- into the company. 

But what goes up often comes down and as it turned out for Digg, the company's future was not going to be nearly as bright as its early years. Yesterday, the company's assets, including the code for the Digg site itself and its domain, were sold to New York-based development firm Betaworks for a reported $500,000.

According to TechCrunch, LinkedIn may have purchased Digg patents for a million-dollar sum, and the Washington Post paid 12m total to acquihire the Digg team. But even with these side deals, Digg's demise is a huge disappointment given the money raised and the fact that, at one point, Digg was on the shopping block for a nine-figure amount.

There's a lot that can be learned from Digg's experience. While it's often more fun to look at success stories (like Facebook and Google), the reality is that building a successful company for the long haul is difficult, and while Digg achieved a level of success most startups don't, in the end, its outcome was far from extraordinary.

Here are the five key things we can learn from Digg's downfall.

Hype helps, but it doesn't build a business.

In the early days of Web 2.0, Digg quickly became one of the highest-profile startups in Silicon Valley, thanks in some part to the popularity of its founder Rose.

The hype around Digg certainly helped: the company's service was growing like a weed and investors were stumbling over themselves for an opportunity to invest. But businesses aren't built on hype, and at some point, a company has to assume that it will need more to sustain its growth.

Your community can abandon you.

Digg was never able to recover from a series of poorly-received, and in some cases disastrous, redesigns beginning in 2010.

While the redesigns may have been well-intentioned -- the company believed it needed to innovate and evolve to stay relevant -- users voted with their feet: they were a big step in the wrong direction.

While one might argue that by this time, there was little Digg could do, but it's worth considering: other popular social communities, like Facebook, had been through numerous user backlashes over botched redesigns and ill-conceived features, and they lived to tell about it.

So it was perhaps far easier for Digg to believe that it could weather its storms as well. Unfortunately, as Digg learned, online communities -- even popular ones with millions of users -- can be pushed too far.

Founder cash-outs are risky.

Digg founder Kevin Rose was responsible for much of Digg's early success. While it's easy to credit that success to his personal popularity, the truth is that under his direction, Digg did a lot of things right -- things that it had to do right to gain the level of popularity it did.

Normally, Digg's success wouldn't have translated to financial success for Rose until the company was sold or went public. But according to reports, investors eager to fund Digg allowed him to cash out some shares to the tune of millions of dollars.

It's a practice that has become increasingly commonplace in the past several years as investors duke it out to get in on the hottest deals. But Digg serves as a warning to investors considering cash-outs: chasing deals in which you make founders rich before they make you richer isn't always a winning approach to investing.

Focus matters.

Even with its immense popularity and significant amounts of funding, Digg's key players couldn't help but scratch the proverbial entrepreneurial itch while running Digg.

In 2005, Rose and one-time Digg CEO Jay Adelson founded internet broadcast company Revision3 to capitalize on the success of their Digg Nation podcast, and in 2007, Rose became involved in launching another social company, Pownce.

Did these extracurricular activities hurt Digg? It's hard to know for sure, but common sense says they probably didn't help. Running a business is hard work, and it requires focus no matter how smart or talented you are. At too many points along the path, Digg's leaders seemed to have believed otherwise.

"Take the money and run" is often decent advice.

Many entrepreneurs today have been inspired by the likes of Mark Zuckerberg, who famously refused to sell Facebook to Viacom and Yahoo. For Zuckerberg, not selling out worked out, and he's one of the world's richest people because of it.

But that doesn't mean that there isn't any wisdom to "take the money and run." After all, few companies achieve Facebook-like success and for entrepreneurs, leaving some money on the table is better than sitting at a table with no money.

Digg could have sold itself for far more than a pittance several times -- probably even as late as a few years ago.

There were certainly numerous reasons it didn't, such as the huge valuations it had raised money at. Which serves as a strong reminder for entrepreneurs about venture capital financing: doubling down may be sexy, but cashing out your chips on your terms isn't so bad after all.

Patricio Robles

Published 13 July, 2012 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (1)

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meka

very interesting!
what about reddit , it was similiar to Digg?
i believe it fell as well

about 4 years ago

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