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A Wrench in Silicon Valley's Wealth Machine

A year ago, cash rained on tech startups like Digg. Now their valuations are slipping, and venture capital is drying up
Robert Neubecker

A year ago there were reports that Digg had hired investment bank Allen & Co. to put the popular news aggregation Web site on the block with an asking price of $300 million. Bloggers predicted that buyers could "easily justify" the price given Digg's popularity, although no deal was ever consummated. Now that number looks like a relic from a bygone era. On Sept. 24, Highland Capital Partners and three other venture capital firms invested $28.7 million in Digg. The specific terms were not disclosed, but that investment implied a valuation of $167 million for the startup, according to one person who has seen the terms of the agreement. Digg executives declined to comment on the company's valuation.

It's no surprise that the value of tech startups is falling. With the deepening recession, even the stocks of highfliers such as Google (GOOG) and Apple (AAPL) have tumbled more than 50%. Still, this is a sharp reversal for a generation of companies that seemed poised to inherit the mantle of leadership in the tech industry. Top Web 2.0 companies such as Digg and Facebook, which built their business on persuading users to participate in their Web sites, were showered with attention and millions of dollars in investment based on the expectation they would be able to cash in by creating the next blockbusters of the Internet. Now those high hopes are coming back to earth.