Over at Valleywag.com there’s a link to an interesting Business Week story about Digg’s financial black hole that’s only getting bigger and bigger as the company grows.

Digg’s burn rate is frightening, evening for a company that has received $28.7 million in secured funding. According to Businessweek.com, “Last year the company lost $2.8 million on $4.8 million in revenue, according to Digg financial statements reviewed by BusinessWeek. In the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue.” That’s a lot of money for a product that could theoretically be maintained by four of five employees and an army of servers or Amazon EC2!

The valuations for Digg, Facebook and many of the other “hot” Web 2.0 properties are a by product of a period of madness. A period of time were anything that required funding was possible and getting access to that funding was a fairly easy process.

A student right out of school with no savings could get a 100% mortgage for a house. A husband and wife with a terrible credit rating could refinance their mortgage and secured debts with a simple phone call. A teenager a concept could could present a pitch to a VC firm equipped with seemingly endless amounts of money and walk away with millions in investment. It was a time where Wall Street and America got drunk together according to President Bush a few months back. That time is gone and the leaders of the Web 2.0 revolution who keep talking about inventing a new business model are going to have to very quickly have to read up on the old business model – making money!

As the recession in the US deepens there will be many web companies closing their doors and turning off their servers and the companies who’ve had ludicrous valuations (and enough funding to keep the doors open for a few years) will inevitably tumble back to reality. After all, investors can only let their money burn for so long before profitabilty usurps nurturing as their number one concern.