Digg's in a hole

In a market starved for venture capital, Digg recently was able to go against the grain and snap up $28.7 million from Greylock Partners, Silicon Valley Bank, Highland Capital Partners and the Omidyar Network.

But, according to a recent piece in BusinessWeek, Digg has some issues. So, it is no surprise that the company's mantra is now profitability – not eyeballs.

For the first three quarters of 2008, Digg was able to generate a mere $6.4 million in revenues. The net loss came tp $4 million (according to BusinessWeek).

At the same time, Digg continues to be a highly popular site, with more than 16 million unique monthly visitors (according to comScore). And, the growth rate remains robust.

But this may not be enough. After all, the Net ad market appears to be frail, making it even more difficult for Digg.

So, if a company with the momentum of Digg is having troubles getting revenue traction, just imagine what many other Web 2.0 operators are experiencing. In other words, expect a major shakeout over the next year.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.