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Startup Digg

Discount offer:

Digg, a social-media pioneer once valued at more than $160 million, is selling for the deeply discounted price of about $500,000.

The buyer is New York technology development firm Betaworks, which is attempting to revive a news-sharing site that was outmaneuvered by Facebook.

Digg confirmed it sold its brand, website and technology to Betaworks. The price is a pittance for a company that raised $45 million from prominent investors including Facebook investor Greylock Partners, LinkedIn Inc. LNKD +0.91% founder Reid Hoffman, and venture capitalist Marc Andreessen.
Digg received higher offers from bidders that included technology and publishing companies and start-ups but ultimately decided Betaworks had the best plan for reviving its brand, these people said. In May, Washington Post Co. hired 15 members of Digg’s engineering team—more than half of the company’s overall staff—for its SocialCode digital media subsidiary.
Betaworks is acquiring a website that still has a well known brand and sizable audience of more than 7 million visitors per month as of May, according to comScore.
Digg was once one of the most promising start-ups in Silicon Valley. The website was founded in 2004 as a way for consumers to put together their own collections of news and other Internet content, rather than relying on the choices made by newspaper editors.

Digg users would post links on the site’s home page, then others would vote on their choices, determining the prominence of the stories they posted.

“They were one of the first social media sites,” says Kristina Lerman, an assistant research professor at the University of Southern California who has studied Digg and other social-news sharing sites. “They introduced social components like having friends and followers.”

The site quickly rose to prominence, in part due to telegenic founder Kevin Rose, a former cable television talk show host. In 2006, Mr. Rose landed on the cover of BusinessWeek with the now infamous cover line, “How This Kid Made $60 Million in 18 Months,” referring to the company’s valuation at the time.

In the fall of 2008, Digg raised nearly $29 million in venture capital from Greylock Partners, Highland Capital Partners and other financiers in an investment valuing the company at around $164 million, according to Dow Jones VentureSource. Over the years, the company was rumored to be in negotiations to sell itself several times, including to Google for a reported $200 million. The deal was never completed.

For early employees with equity stakes in the company like Owen Byrne, the site’s first lead engineer, the failure to sell the company was a huge disappointment. Mr. Byrne, who left the company in 2007, said in an interview he never got to “cash out and go live on the Riviera.”

But the audience started to drift away in early 2010 when services such as Facebook and Twitter exploded in popularity, as users preferred getting article recommendations from their friends or people they followed.

A series of redesigns, some of which weren’t well-received by users, also hurt the company. A site relaunch in the summer of 2010 triggered a backlash, with most users saying they preferred the old Digg. By the end of 2010, Digg’s audience had fallen by more than half, according to ComScore.

In March of last year, Mr. Rose, the founder, resigned from the company. He is now a venture capitalist with Google Ventures.

Betaworks intends to fold Digg into News.me Inc., a digital media start-up that Betaworks launched in April 2011. News.me sends users links to news articles that their connections on Twitter and Facebook are reading and talking about. News.me, which uses an iPad and iPhone app and daily email newsletter, has about 10 employees.

Digg shareholders also received a very small amount of warrants in the combined Digg and News.me company worth a few percent of the new entity, said a person familiar with the matter. Digg investors are not receiving any equity in Betaworks, said the person.

The new combined company is very young and unproven and hard to value, but internally Betaworks values it around $5 million to $10 million, making the warrants worth a few hundred thousand dollars on paper.

None of Digg’s remaining employees will join Betaworks as part of the acquisition. Chief Executive Matt Williams will join venture capital firm Andreessen Horowitz as an entrepreneur-in-residence.

Betaworks CEO John Borthwick will become Digg’s new chief.