Startups in Silicon Valley are like old generals. They don’t die anymore, buoyed on life-rafts of lingering venture capital and modest revenues. They just fade away, eventually purchased for assets that are a shadow of their former promise. It’s pretty clear that Digg is on that path. The company isn’t dead, but it’s been fading away for a while, and its soul is all but gone. The company can spin it however it wants– the final nail in the coffin is news that founder Kevin Rose– long Digg’s greatest asset– is leaving.

I’m traveling in Indonesia, so the news will be old by the time you read this, but you’ll have to forgive another sentimental post. Digg has always represented the spirit of the early Web 2.0 movement to me. Facebook has never been the emblematic company of the Web’s mid-2000 resurgence, because it has always been such an outlier from the pack. But Digg– like Delicious, Six Apart, Flickr, YouTube and others– was one of those messy, risky companies founded at a time when no one was ready to believe in the Web again. The scars from the 2000 bust were too deep. These companies weren’t celebrated like Web startups today– they were mocked. People thought the founders were delusional.

The entrepreneurs were the exact opposite of the kids today seduced by the promises of Y Combinator, easy cash of super angels and lure of TechCrunch headlines. They were doing something that still stank of broken dreams and evaporated billions. And they were doing it for one simple reason: they couldn’t stop themselves.

And Digg was one of the first to prove you could take advantage of a decade of open source development to start a company for dirt cheap, one of the first to prove you didn’t have to be a technical genius to build a great product, and one of the first to prove a rabid community could make a site explode very, very quickly. Digg was never the biggest company of the movement, but it was bigger than many, and it stood for something. It was the everyman. This is why I put Kevin Rose on the cover of BusinessWeek in 2006. It was his first cover, my first cover, and one of the first national magazine covers about the Web 2.0 movement, period.

That cover– with provocative cover language cooked up by my wily New York editors to move copies– sparked a lot of hatred. It was my first brush with controversy, and one of BusinessWeek’s first big blog scandals as well.

But that cover also sparked inspiration, and the credit for that doesn’t go to BusinessWeek or me, it goes to Digg, Jay Adelson and Rose. It was the first time I saw young people reading BusinessWeek around San Francisco. On magazine racks it wasn’t put back with business publications, it was put back next to copies of FHM and Maxim. And recently BleacherReport founder Bryan Goldberg told me that when he read that cover back in 2006 he felt something he’d never felt reading a business magazine or even watching athletes and rockstars–sheer, consuming envy. If this kid– not a genius like Bill Gates, just a kid with an idea– could build Digg, why couldn’t he build what would later become BleacherReport? It was something that pushed him to quit his job and follow his own dream.

Fair disclosure: That cover probably helped me more than anyone. It landed me a book deal that changed my career. And I first met Michael Arrington right after it ran. He introduced himself to me just outside the Web 2.0 conference, and said he liked the story. That friendship changed my career too, and it was the first of many times he’d defend me against haters.

What Arrington got that others didn’t was that these companies and the Web 2.0 movement were only getting started. Among the article’s “outrageously overstated claims” was that YouTube could sell for $500 million. It sold for three times that a month or so later. The article argued Facebook could be worth more than MySpace. Again, that soon proved understated too. And Digg? Well we got Digg exactly right. We said it could sell for between $150 million and $200 million, and over the next few months and years there were several negotiations and at least one solid offer in that exact range. But Digg — unlike peers like Flickr and Delicious– said no, and its best days seemed ahead of it.

So what happened? In my view, Digg had a lot of things right. More than a million people loved its product– rabidly loved it. They loved it in a way we’d rarely seen until that point. Digg had top investors. And it had the vision part, too. Rose’s mission has played out. Digg helped transform how we consume media. While media properties balked at the idea in 2006, share buttons litter the Web today. We no longer rely on media gatekeepers for news. No one tells us what the front page should be– we create our own with the help of our friends.

Unfortunately Twitter is the one that’s pulled the bulk of his vision off, not Digg. It’s another example of what I’ve argued before– that it’s frequently not the company that comes up with something first that nails the execution. (And it might explain why Rose spends so much time on Twitter.)

The lesson from Digg is crucial as Silicon Valley’s ecosystem has made it easier and easier to start a company. It’s that a great product is necessary but not nearly enough. Building a real company is harder, and it takes execution and leadership. Things like a New York-based CEO and a sometimes-distracted co-founder took a toll on Digg in its most pivotal days. As I wrote in my book a year after that cover, startups reflect their founders’ personalities. Back then, Slide was characterized by silent intensity, Facebook was like a messy, pizza-stained dorm room, and Digg? Well, Digg’s offices were empty most evenings.

I have no doubt that Rose and Adelson are stronger after Digg than they were before. After all, few people remember that before Zynga, Mark Pincus’ Tribe didn’t live up to high expectations either. Like Pincus, I believe they both Rose and Adelson still have their biggest successes ahead of them. Adelson has already moved on with SimpleGeo, and Rose is moving on with a new mystery project.

There will be haters on this post. And that’s fine. But the people who write checks in the Valley have respect for what Digg built, whether the founders fell short or not. Smart people will always want to back these guys– as Mike Maples said on Ask a VC last week– and people like Arrington and me will root for them again.

That’s what makes the Valley such a unique place. (Photo by Thomas Hawk.)