Technology and business headlines were recently dominated by the somewhat shocking story that social media pioneer Digg had been sold for the paltry sum of $500,000. That headline wasn't entirely accurate, since it only represented the sale of some assets. The total price was closer to $16 million, which is still only a fraction of the $100 to $200 million the company was valued at just a few short years ago and a rounding error compared to the valuations of Facebook, LinkedIn, Twitter, Pandora and others. Small-business owners can learn several valuable lessons from this story and hopefully avoid a similar fate.
Digg was founded in 2004 by entrepreneur Kevin Rose. The service allows users to post interesting news stories from around the Web. Other Digg users then have the option of voting for stories they agree are valuable and interesting. The stories with the most votes get promoted to the front page. This may not sound like a big deal, but in 2004 it certainly was. Then—and for several years following—Digg was an efficient way for like-minded users to find, sort and rank relevant news from among the billions of pages of content available on the Web. The company raised $45 million in capital, had a board of drectors filled with brand-name business leaders and a significant first-mover advantage.
Despite all of this, the company ultimately failed. Competition from new entrants, changing user preferences and an inability to manage rapid growth are reasons that are typically given for business failures, and while the company had to deal with these issues, I don't believe they are what led to Digg's demise. Instead the factors were greed, pride and a lack of discipline. The lessons we can all take away are:
Be realistic when it comes to valuation, not greedy. While Digg was an innovative service, it was basically a one-trick pony with a limited ability to grow beyond its core service of aggregating and promoting news among its audience. The company's business model had limited revenue potential. Despite this reality, it’s reported that the company turned down a $100 million acquisition offer in the hopes of holding out for 50 percent more. At that point the company had only been in business a few short years.Everyone likes to point out that Facebook repeatedly turned down acquisition offers and in that case it paid off tremendously for founders and investors. Are you willing to bet your company and your retirement that your business is the next Facebook? I wouldn't. It’s easy to get caught up in a frenzy and if you happen to be in one, ask yourself if during normal times the acquisition offer would be considered a good deal. If so, take it.
Don't assume that you know more than your customers. You don't. Most analysts—and even the founder—agree that the key event, which assured the company's demise, was the launch of Version 4 of Digg. It was a major redesign that eliminated many of the core features popular among users. It also changed the nature of how users were able to access shared articles. These changes were apparently made for reasons other than customer demand. Whatever the reason—enhanced profits, appeasement of investors, over-zealousness from the engineering team, pressure from the marketing department, change for the sake of change—they shouldn't supersede the importance of customer preferences.
Define your core offering and stay ahead of your competition. While Digg was busy doing other things, companies like Facebook and Twitter found better ways to share stories. Had the company focused on its core customer services it would have realized that a big headache for them was the process of Digging a story, which required eight separate steps; compare that with simply clicking on Like, Share or Tweet.
The market for this type of service does exist; Digg competitor Reddit is doing very well, with over 30 million unique visitors per month and billions of page views. It wasn’t the market; it was the company.