Digg funding raises questions

As we reported earlier, Digg has raised a Series C round of $28.7 million. The official line on the funding is that the money will be used for international expansion, new staff and a new office.

Om Malik reports a whisper that Kevin Rose cashed out some of his shares in the round, a trend among startups lately taking extra money, which might explain some of the money. Tek Populi takes the piss with “VC’s Are Livid With Digg: Wanted Cash For Digg BlackMarket, Not More Bongs and Beer,” and although it’s tongue in cheek, there are questions raised that should be asked.

Exactly what’s going on with Digg at the moment? $28.7 million for internationalization and some extra features? seriously? After $11.3 million in funding to date, a lucrative ad deal with Microsoft, and 224 million page views a month, they couldn’t expand without taking more money?

Negotiations with Google for a $200 million acquisition were allegedly terminated in July when Google walked away after completing due-diligence, raising questions then about Digg, and now 2 months later the company needs a big round to grow the company on a path that for most firms would be the natural budgeted direction.

At best I can only guess, but I’ll take a couple of stabs: 1: Digg is bleeding money or is only marginally profitable. How I don’t know, but foreign expansion and new staff hires would have been affordable if Digg was making money, and/ or 2. Kevin Rose threatened to walk, and the only way to keep him at Digg was to raise a new round and let him cash some of his shares. This point makes sense when you consider how many times Digg was suppose to be in negotiations for a sale, and that Rose has interests in other startups (Revision3/ Pownce), so you’d presume that he’s been looking at getting out for some time.

Let me say though that I like Rose, I like the company, and I’m not trying to hate on Digg here. However, I also don’t buy the spin. Either Digg’s not performing financially, and/ or Rose threatened to walk.