Don’t believe BusinessWeek’s bubble-math 04 Aug 2006
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This week’s BusinessWeek cover story features a beaming Kevin Rose from Digg. Across his chest it says “How this kid made $60 million in 18 months.” Wow, now that sounds like a great success story.
Too bad it’s a blatant lie. BusinessWeek knows it. They prove it themselves in the article:
So far, Digg is breaking even on an estimated $3 million annually in revenues. Nonetheless, people in the know say Digg is easily worth $200 million.
$3 million in revenues and they’re breaking even. That means no meaningful profits. That’s the first hint no one has made $60,000,000. Their gross revenues aren’t even anywhere close to that number. And let’s leave out the “people in the know say it’s easily worth” fantasy numbers. And certainly don’t use those numbers to do the math that makes the cover (we’ll get to that in a minute).
It’s one of those things where we know we could put crazy ads all over the site and clutter it up, but we don’t want to do that,” says Rose. “We have a clear path toward becoming a profitable company.”
A clear path toward becoming a profitable company. How does a path that you haven’t traveled yet get you $60,000,000? The biggest investment they’ve had was $2.5 million. You can’t cash out $60,000,000 from $2,500,000.
That could be a jackpot for Rose, who owns 30% to 40% of the company (he won’t specify) — a massive stake for a founder in a world in which investors routinely demand up to 20% with every outlay. But it’s still only paper wealth, which he and many others have learned can evaporate. “I was here in 2000,” he recalls in an instant message.
Wait a second. This $60,000,000-on-the-cover figure came from multiplying the fictitious “people in the know” number of $200,000,000 by an estimated 30% ownership? 30% of $200,000,000 is $60,000,000. Is that the math that made the number that made the cover? SLIPPERY. And then Rose and BusinessWeek acknowledge it’s “only paper wealth” and “this could be a jackpot” which means it’s not real anyway. So BusinessWeek is using fuzzy math to put a fuzzy number on the cover that isn’t real anyway? All together now: BULLSHIT!
Something my dad always tells me: “No one ever went broke taking a profit.” Last time around plenty of people went broke by not taking a profit. Paper wealth is not money. Try bringing your brokerage statement to McDonald’s and see if will buy you a burger.
And then there’s this:
“The barriers to entry are now so low that all it takes is a laptop and a $50-a-month Internet hookup to make a kid the next mogul”
So why are you writing about an 18-month old company that took $2.5 million to be “finally be flush with enough cash to pay salaries, rent an office, and keep employees in standard startup snacks like Twizzlers and Vitamin Water.” If BusinessWeek wants to say it only takes $50 and an internet connection to be the next mogul they may want to cite a valid example. It’s certainly possible, but Digg isn’t that example.
Now, this isn’t a dig at Digg or Kevin, it’s a dig at shoddy journalism. There are a lot of great things to say about Digg so pick something that’s not true? Why lie in big yellow type on the cover?
UPDATE: Scott Rosenberg, writer and editor and co-founder of Salon weighs in. It’s great to see someone in Scott’s position calling BusinessWeek on this.
UPDATE…THIS JUST IN: How 9rules founders made billions in 12 months.