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On Thursday, Digg announced that it raised an additional $8.5 million in financing from its existing investors, Greylock Partners and the Omidyar Network, which is run by eBay (NASDAQ:EBAY) founder Pierre Omidyar.

According to the many sources: “Greylock investor David Sze says Greylock and Omidyar weren’t interested in having an outside investor dilute their holdings, and that Digg’s management didn’t want to waste time in trying to raise money at a higher value from other parties.”

This puts the full amount of money raised at over $10 million. I do not care what people say: $10 million of financing is a lot of money for any company, let alone a bookmarking site. But more on that later.

Digg is a wildly popular social news bookmarking service. It’s arguably the largest of its kind, with “laggard” Reddit selling earlier this year to Conde Nast for an undisclosed sum. Suffice to say that Reddit sold for more than $8.5 million, we pegged the value in this post and outlined why it was a good deal for seller and buyer.

In addition, yes, Digg is worth $8.5 million, we just asked the question to get your attention. But this makes us wonder if one would not be better off buying one of Digg’s competitors for $8.5 million and positioning it against Digg.

Investors: Two Are Better Than One

The fact that the company did not need to go outside proves one thing (again): if you are an entrepreneur, try to have two investors. I sometimes think that having more than one investor is a headache because you have more captains trying to navigate the ship, and with all due respect to the investing community, sometimes one captain is more than enough.

I am not trying to come across as a “I think I know it all” kind of entrepreneur. Anyone who knows me knows that I am quite the opposite, but in this environment, many of the business ideas, business models, revenue stream potentials and exit strategies are not conveniently found in a neat playbook.

It’s a wild new world. While history definitely offers clues as to the best strategy to take, sometimes having too many stakeholders makes the water murky instead of clearer.

While I still believe that, to some extent, a few deals have made me realize that the pros and upside of having more than one investor far outweighs having only one.

I am not sure if Greylock Partners and the Omidyar Network really want to pony up more money considering that Digg has already turned down a rumored offer from News Corp. (NASDAQ:NWS), an otherwise fine, stable company that could really use Digg (and vice versa) to further gain traction online. The fact that Digg supposedly asked for $150 million would suggest to the investors that they might not get any exit by holding out too long.

After all, there are way too many social bookmarking sites out there, and we’ve seen throughout history that a #2 service can become a very solid player with the right partner/big brother.

This is not to say that Digg will not thrive. I think given Kevin Rose’s personality, he might, in the end, fare better in life (though not financially necessarily) by holding to his guns and remaining independent. This is what I also think of Mark Zuckerberg. The dude can make $300 million to $500 million but is wary of selling out. But, Zuckerberg has a clause that no VC can take the CEO title away from him. Zuckerberg’s Facebook is also generating considerable cash flow. Digg, while surely [for the love of all things holy] should be profitable, probably does not generate the kind of revenues or profits that Facebook does.

As such, accepting an offer to sell is not the same proposition that Zuckerberg faces.

And The Money Is For...

Which raises my next and main point; while everyone in the blogosphere is merely covering this latest round of financing, I wonder whether anyone has asked:

Why on earth does a site that simply offers a bookmarking tool need $8.5 million?

Maybe they plan on paying bookmarkers. But, doesn’t that defeat the purpose of user-generated content? Oh, we covered that as well previously here.

The spin is they want to hire programmers and developers. Again, $8.5M worth of them? The truth is that Digg admits that its board does not care about profits, just user base. The problem is that unlike a social network which at least retains the users and gives them an online home, Digg’s user base is rampant with those who seek to trick the service, and the ones who troll the comments take away - and do not add - from the service.

Forget the fact that the company is in simple denial about being gamed by a few bad apples and marketers… we won’t even discuss that. We know that the bulk of Diggs come from a few top diggers. But as the company becomes more established and loses its startup, upstart luster and dare we say it, pays the top diggers, what is it then…

That’s right, Slashdot: a handful or dozen of editors that choose what is newsworthy. Nothing too Web 2.0 there now is there? And, let’s not even start with the Web 2.0 nonsense.

There’s nothing wrong with Slashdot, of course, but is it still worth what investors are agreeing what it is by adding more financing?

And, that’s a best case scenario. A more likely scenario is that the company proves to be hollow: over time, Diggers realize they’re doing the legwork for the management and investors to recoup the windfall.

Actually, best case scenario is hundreds if not thousands of diggers continuing to spend hours each day bookmarking news stories and doing the leg work. Yeah, you can snap out of it any day now, we’re certainly not in Kansas 1999 anymore.

Source: Would You Invest $8.5 Million In Digg?