Blog Post

Digging Vapor(m)illionaires

Kevin Rose is worth $60 million (Read), his little start-up, Digg is worth more than Google (Read), and he is the new Web 2.0 poster boy. Everyone is talking about this story, mostly because of a misleading cover headline in this week’s Business Week. “Valley Boys: How this kid made $60 million in 18 months,” has even Rafat, normally very mild mannered upset, enough to write: “it sounds like a parody of a parody.”

However, as Rafat says, we should separate Digg, the company, from Digg, the headline. As a company, Digg’s story exemplifies some of the big trends that have reshaped Silicon Valley. (Business 2.0 has kept you upto speed on these trends for past three years.) Rise of the Instant-Companies and The New Road To Riches, identified that cheap hardware, cheap bandwidth, open source software and special idea = low cost way of starting a company. Digg did exactly that.

In the fall of 2004, Rose withdrew $1,000 — nearly one-tenth of his life savings — and paid a freelance coder $12 an hour to mock up a Web page. He got a deal on server space over the Web for $99 a month.

Digg, had initially shunned venture capital investment, boot strapped before taking a few millions from VCs. Okay not exactly the path 37Signals took, but fairly close. Digg has $3 million in revenues and is going to break even soon – in two years with about 15 employees. That can’t be a bad thing.

What’s terrible: the the vapormillionaire concept, for I fear, this is going to the attention of the Khaki-Blueshirt crowd, who will book a ticket on JetBlue, and head out West. Or as they say, there goes the neighborhood … again!

6 Responses to “Digging Vapor(m)illionaires”

  1. Digg is more likely worth about a tenth of what BW says.

    The most recent valuation method I have seen is taking between 20 to 40% of annual revenues, to approximate cash flow margin, and then putting an 18 to 20 multiple on that (which is around what Google and other new internet companies trade for as a multiple on cash flow margin). If $3 mil a year in revenues is accurate, that would value Digg at around $11 million on the low side to around $24 million on the high side.

    If they were generating $3 million a month in revenues THAT would reasonably call for a $200 million valuation. Maybe someone at BW made a calculation error? Or maybe their expert source did?

  2. Om, this is the kind of hype you’d expect out of some ‘”pump and dump” e-mail stock spam that would go something like this:

    =========
    BW Stock Profile Of the Day – HOT HOT HOT

    HOT STOCK NOW – “$200 MILLION” ACCORDING TO PEOPLE IN THE KNOW!

    Digg.com (stock symbol DIGG) is going to take off this morning because people in the know are valuing it at $200 MILLION!

    Don’t wait, this stock is going to take off and you are going to miss out on the next Google. Just look at these numbers!

    Revenues – $3,000,000!
    Profits – Now Breakeven and able to pay the rent!
    Current Value – $3,000,000
    Projected Value Next Week – $200,000,000!!!!!!
    You Make – 66,000% !!!

    Buy it now. This is a freebie just for readers of BW stock promotions e-mail list.

    ========

    BW deserves to be getting bashed.

    Best,
    George

  3. Only $3M/year? Sounds like they aren’t capitalizing on their viewers all that well… I’ve found that monthly revenues closely follow the daily traffic trend.

    If Digg is pulling over 800K uniques per day, they should be pulling around $600K to $700K in ad revenue, or roughly $7M to $9M per year.

    Then again, they don’t display a ton of ads – one simple bar at the top, so $3M is reasonable.