Hot Start-Up Cover Stories That Went Oops

by Tom Taulli | July 15, 2012 8:00 am

Digg had a chance to be the next Facebook (NASDAQ:FB[1]) or Twitter. But unfortunately, the pioneering social media site was unable to keep up its popularity. According to The Wall Street Journal[2], Digg was sold for a mere $500,000 on Thursday. Consider that a few years ago, the company fetched a valuation of $160 million.

Perhaps one of the biggest ironies of the Digg story is this cover story from BusinessWeek‘s August 14, 2006, issue:



But interestingly enough, the media has gotten things wrong many times with social media. So let’s take a look at some other notable front-cover misses:


In 1999, 19-year-old Shawn Fanning launched Napster. He also had the help of Sean Parker, who would go on to help Mark Zuckerberg create Facebook.

Napster was a peer-to-peer platform that made it easy to share files, especially music. From the start, the traffic surged and would eventually reach a peak of 25 million users.

[4]Of course, the U.S. recording industry wasn’t pleased and sued Napster in late 1999. A year-and-a-half later, a judge issued an injunction against the service, which had no choice but to file for bankruptcy.

However, the incident made it much easier for Apple (NASDAQ:AAPL[5]) to set up a deal with the recording industry to create iTunes.


Heard of Jonathan Abrams? Probably not. But he started Friendster in 2002. The site was the first major social network.

Its growth was explosive, and Abrams had little trouble rounding up venture capital. He also got a buyout offer from Google (NASDAQ:GOOG[6]).

[7]So what happened? At the core of Friendster was a system that spotted people that you were connected to (by four -degrees). It was an interesting idea, but users really didn’t care.

Also, Friendster’s underlying technology couldn’t scale up as more people joined. It was not uncommon for a page to take a couple minutes to load!

By 2004, Friendster was surpassed by MySpace and then Facebook.


In 2003, Chris DeWolfe and Tom Anderson were struggling dot-com’ers. But they saw the success of Friendster and set out to replicate it — almost feature-by-feature! MySpace was born.

[8]Based in Los Angeles, the site got a huge lift from its wide adoption among celebrities. Then in the summer of 2005, Rupert Murdoch’s News Corp. (NYSE:NWS[9]) shelled out $580 million for MySpace. At the time, it looked like a big coup.

But MySpace’s underlying technology was weak. And, by being part of a massive media conglomerate, it became mired in corporate bureaucracy. By early 2008, Facebook took the lead.

A few years later, MySpace was an uncool social media has-been and was sold to Specific Media for only $35 million.


OK, Groupon (NASDAQ:GRPN[10]) has not imploded. If anything, the company continues to grow like a weed.

Still, Wall Street is skeptical. Since coming public in November of 2011, Groupon shares are down about 70%.

[11]Then again, Groupon has had some major issues with its accounting. Even before its public offering, the company had to restate its revenues for the first half of 2011, from $1.52 billion to just $688.1 million. And then it had to make another restatement in April for not adequately estimating the returns on its vouchers (that was for the fourth quarter).

But the biggest concern: Is Groupon’s business model viable? True, consumers like to get cut-rate deals. But those bargains also cut deeply into the margins for merchants.

And of course, the history of social media has been brutal. For the most part, a company will fail merely because people just get bored and look for the next cool fad.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to [12]IPO[13].  Follow him on Twitter at @ttaulli[14] or reach him via email[15]. As of this writing, he did not own a position in any of the aforementioned securities.

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