Anyone remember this 2006 BusinessWeek cover? Digg was just sold to Betaworks for a reported $500,000 according to the Wall Street Journal (the exact value of the deal’s in dispute), which likely went entirely to investors.
Kevin Rose is surely worth millions today due to his founding of Revision 3 and his savvy investments in companies including Instagram, but it’s unlikely he made any of that $60 million form Digg reported by BusinessWeek, aside from whatever salary he received.
As companies today announce they’re joining the “billion dollar club” as they raise new rounds of capital, it’s important to understand that valuation is simply a function of what percentage of a company it’s willing to sell in exchange for cash. For example, if you came to us and said you wanted to invest $100 million in Muck Rack, and we said sure, we’ll give you 10% of the shares in our company for that, Muck Rack would have a valuation of $1 billion (.10*X=100,000,000). Is it really worth that? You decide (we think it is!). Either way, we haven’t “made” squat from raising money. You only make money through revenue, being acquired and or selling shares.
We post this not as a criticism of BusinessWeek, which is under new ownership since the infamous cover, but as a reminder to all journalists during this tech boom that valuation doesn’t equal value.