• BusinessWeek, Friday, December 19, 2008 12 PM

Last year at this time, news aggregation service Digg hired investment bank Allen & Co. to put itself on the block for an asking price of $300 million. Bloggers predicted that buyers could "easily justify" the price tag for Digg, although no deal ever materialized. BusinessWeek says those were heady days for popular Web 2.0 startups. On Sept. 24 of this year, Highland Capital Partners and three other VC firms invested close to $30 million in the firm. The valuation: $167 million, according to sources close to the deal.

Across the board, the value of Web and technology startups is falling. Digg, Facebook, even Twitter, which have built businesses on the back of their popularity, are seeing their once lofty valuations fall back down to earth. "Declining valuations are throwing a wrench into the gears of Silicon Valley's wealth machine," says BusinessWeek's Spencer E. Ante. If the money dries up, startups are forced to shut down.

Meanwhile, for more stable startups like Digg, "complications abound." Less money makes it harder to attract the best talent. For top talent already at the company, underwater stock options may cause them to leave. Falling asset values also leads to M&A activity drying up, as buyers wait for prices to drop further. "This is the worst time to (sell)," says Raj Kapoor, managing director of venture firm Mayfield Fund. "The feeling amongst buyers is that there will be better value if they wait until 2009."

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