News site Digg raises $8.5M more, rejects evidence it has been gamed

UpdatedDigg, the news site that lets users rank stories by voting, has raised $8.5 million in fresh financing from existing backers, putting to rest for now speculation that it might sell to a bigger media player.

The latest financing was reported by VentureWire (sub required) this morning. According to the report, the funding comes from previous investors, Greylock Partners and the Omidyar Network, which is run by eBay founder Pierre Omidyar.

Statistics have become a major sticking point for Digg, with the company saying in October that it has 20 million users, while conservative measurement sites like Comscore say Digg has a mere 1.3 million. VentureBeat reported on the statistics mess here. The confusion is significant because it points to uncertainty about just how popular the site is. Supporters say Digg is the way of the future, riding the “Web 2.0″ wave, whereby users get to interact with and contribute to news filtering.

When measuring Digg’s performance, mainstream news publications continue to rely on statistics from Alexa, which are notoriously unreliable because the site draws data from a very small base of people — Web administrators who have downloaded an Alexa toolbar on their computer, people who are more likely to be “geeks” playing with sites like Digg. BusinessWeek started off the trend, with a much hyped story, citing Alexa to suggest Digg was nipping on the heels of the NYT. The Mercury News today points to Alexa as evidence Digg is a top 20 U.S. site. VentureWire points to Alexa to say it is a top 100 global site. There’s little question that Digg has grown robustly, however. Compete, another free measurement site, puts Digg’s ranking at 144. VentureBeat wrote about Compete’s methodology here (scroll down).

Digg’s limiting of investors to insiders may be more evidence that Digg’s progress is too controversial for outside investors to agree on investment terms — insider investors presumably argue that Digg is worth a lot more than outsiders do. However, we’re not certain about this. It is normal for venture capitalists to let an outside investor come in and set an independent value for a company. But there are exceptions. Insiders may simply feel that Digg is worth so much they don’t want to let outsiders participate. (Update: We’ve just talked with Greylock investor David Sze, who says Greylock and Omidyar weren’t interested in having an outside investor dilute their holdings, and that Digg’s management didn’t want to waste time trying to raise money at a higher value from other parties. Sze said Digg’s usage continues to grow, and is confident that Comscore is undercounting it. Comscore ignores Digg’s RSS users, which could account for between 30 and 40 percent of all users, he said. Comscore also ignores international usage. In all, Comscore undercounts Digg’s traffic by up to three or four times, he says.)

Digg recently integrated new media to its site, including video.

However, the site continues to get gamed. A top “digger” recently admitted a marketer had convinced him to digg a story about the marketer’s company, JetNumbers, in return for free services — just the latest evidence the site is being gamed by spammers. It is remarkable, therefore, that chief executive Jay Adelson dismisses suggestions his company has been gamed. “First of all, I don’t believe it happened,” he tells VentureWire, though VentureWire may not be providing the full context of his remarks. VentureWire apparently did not raise the JetNumbers or other cases. Digg is not profitable, Adelson added.

Update: Adelson comments below that he was taken out of context.

Update: In other remarks, Greylock’s Sze said Digg is unlikely to be sold anytime soon, and is more likely to focus on partnering with other sites that have expressed interest in integrating Digg’s format into their own sites. Music sites, for example, are interested, he said. The non-tech news parts of Digg’s site are bigger than the tech news, he added. Finally, regarding the gaming of Digg, Sze said the company is busy putting in safety measures to stop this sort of thing happening — and that Digg can continue to grow despite being targeted by spammers, just as Google and eBay did.

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