VC-backed Digg aims for sunnier days ahead

Among the rumored IPO candidates lately has been venture-backed Facebook and, among others.

A company that’s missing from those lists is the San Francisco-based news aggregator Digg, which has raised more than $40 million from Highland Capital Partners, Greylock Partners, Omidyar Network and a several angel investors.

The five-year-old company now claims 40 million registered users. But over the last 12 months, it has been eclipsed by Twitter, which now claims 75 million registered users, and Facebook, which has reportedly signed up 350 million people.

Traffic numbers tell a similar story. At the end of December, Facebook had 117 million unique daily visitors nationwide, while Twitter was attracting 23.6 million and Digg had 14.7 million, according to Quantcast.

“Digg is a very high-quality company, but Twitter has taken a fair bit of wind out of its sales,” says Steven Fletcher, a managing director at the bank GCA Savvian.

Digg, whose traffic has been flattening over several months, according to both Comscore and Quantcast, “can turn things around, but downward momentum is very hard to stop,” says an investment banker, who asked not to be named.

He adds: “[Digg] is too small right now to consider an IPO anyway. Their revenue can’t be more than $30 million annually and they’d need three times that” for a shot at the public markets.

Such concerns aren’t lost on the company. CEO Jay Adelson tells PE Week that Digg has a number of major initiatives in place that it expects will propel the company’s user base and sales.

For example, Digg expects to soon introduce a spate of sites, centered on niche content.

Adelson wouldn’t disclose when the rollout will occur, but he says it will be an iterative process, one that calls on the feedback of Digg’s loyal audience of users. He adds that there will be “lots of different mediums” by which people will be able to access the content.

Digg is also looking to make more money off advertorials that are clearly marked but designed to look like other article links that people “digg,” and which appear prominently on its landing page. The performance-based ads are already performing well, Adelson says, thanks to the ability of Digg’s advertisers to optimize them. If the ads are voted out of the system quickly by Digg users, advertisers pay less for them.

While Adelson says the ad system is still in the “experimental” phase, Digg hopes to soon sell major newspapers on the concept, and share in the revenue with them.

“Search today sends tons of traffic to [major publishing] sites that they are unable to monetize because they don’t have any demographic information about those visitors,” Adelson says. “It’s dumb traffic.”

Instead of publishers posting bottom-of-the barrel remnant ads that are essentially worthless, Adelson argues that Digg, which has plenty of data about its users, could “put ad product on their system, giving them revenue that’s an order of magnitude higher than what they were going to see on their own.”

Whether the company’s new directions prove fruitful remains to be seen, though Adelson says that “our investors have our back.”

The atomization of Digg’s content will ostensibly allow it to capitalize on the more lucrative promise of niche versus broader-based content sites. As for its new advertising system, Digg is still in “discussions with major publishers, but a lot of the details still have to be worked out,” he says.

Digital media analyst Greg Sterling points out that Digg shouldn’t be written off, and it is still a possible IPO candidate.

“Digg’s audience is still very substantial and that means something,” Sterling says. “There aren’t that many places online where advertisers can get access to such large networks.”

“Internet brands tend to build over time,” adds Andrew Lipsman, the director of industry analysis at Comscore. “As much as is often written about things coming and going, that process doesn’t happen overnight. I think Digg is still very much in the growth phase.” —Constance Loizos