Digg's fall was actually a pretty interesting "case study" on the dangerous of trying to monetize a website too much too fast.

The fall started a good two-three years before the actual implosion, when Digg began looking for growth capital. They sold off a significant portion of their interests in exchange for this capital (over the course of three separate deals, culminating in a $30M in exchange for an undisclosed shit-ton of equity one in late 2008) , and the VC brigade took the wheel to a machine they didn't understand.

On the web, if a website is "free", it's because the user isn't the customer. The user is the product. That's a truth that most people know and understand, but accept no less because having your eyes sold on someone else's behalf isn't so bad if they provide a worthwhile product in return. Take Reddit. We're the product being sold to advertisers. But Reddit is a good website with interesting content, and the "selling" of our eyes goes by largely unnoticed. Even if it is the endgame, it's not obvious to the user.

The Digg VC group (Highland Capital Partners was the main firm, there were a few in the mix though) didn't understand the importance of making sure the user does not feel like a product. They assumed that, because Digg was so popular, it would just stay that way. The actual content was irrelevant, people would come to Digg because it was Digg.

So, instead of continuing the path of organic, user-driven content, they figured "content is content" and took that control out of the user's hands. They put it into the hands of "power users" originally, then even less so and more into the hands of anyone with a few bucks to throw their way.

Imagine how different Reddit's front page would look if it was ranked by how much gold was spent on any given link. It would be made 100% out of thinly veiled ads. Nothing would be on the front page unless it was trying to sell you something.

Well, that's the direction Digg took things in. And it was a disaster. So they tried to backpeddle. More disaster. The V4 overhaul was the nail in the coffin, though. All of this VC nonsense was leading up to V4...which was rushed through development by none other than the VC groups who were running the show.

They cut the budget on the development dramatically, removing most of the QA process and forcing the thing out the door well before it was ready for prime time.

The result? V4 was a shit show. It broke every 10 minutes, was down for hours on end, and on top of it all...it was a shitty design.

Pop Quiz hotshot: You're the director of a major website that, while once-invincible, is now hemorrhaging users on a daily basis. What is the one thing that will solidify your demise?

Time's up.

The answer? Downtime. Well, downtime in conjunction with a viable competitor. You're looking at the viable competitor right now. When the curtains went up on the V4 shit show (and down, and up, and down, and up), Reddit didn't have to do anything but keep the lights on. The Great Digg V4 Exodus was the culmination of two years' worth of bad decisions on the part of Digg and its investors. More so the investors, but Digg's original staff made a bad choice to join them in the first place, and another one when they gave up as much control as they did.

Look at Reddit in contrast. They've just received a whole lot of money, but gave up very little control. They recently pulled in 50 million on a 500 million dollar valuation. Digg, at its high point, had a valuation of around 150M. The Highland Capital deal brought in about 30M, in addition to the 15-20M they already had outstanding with other investors. The valuation that the HC deal gave wasn't disclosed, but it was almost certainly less than 150M (my guess is that an unprofitable company with 8M in revenue didn't get more than a 100M valuation). Digg easily had over 50% of their equity tied up in VC...and those were the people pulling the strings all the way up to the V4 implosion (indeed, investors "fired" two CEOs, one being Kevin Rose himself, over the course of the next three years).

A lot of people at Digg saw the writing on the wall well-before it went tits up. There were a number of high-ranking staff members leaving the company, developers talking about a shitty environment...all kinds of "bad omens".

The actual fall was definitely fast-and-hard, much like the fall of, say, Enron. But the build-up was spectacular. I can't imagine that a number of people didn't see this coming a good year before it happened. I'm sure there was someone who looked at the Highland Capital deal and thought "This is our poison pill right here. This is what will kill us".