Perspective: Bubble redux?

perspective I'm starting to hear the "B word" an awful lot again.

Maybe it's because of all the hubbub surrounding "Web 2.0." Maybe it has to do with Google's relentless climb to $500 a share. Maybe it's all the attention being lavished by the business press on--sorry guys--ideas that don't have a snowball's chance in hell.

Choose whatever explanation you like best, but it's time to ask whether the tech industry is back in another bubble.

I know. It's different this time around. I wish I had a nickel each time I've heard that line--by now, yours truly would be kicking it in the Bahamas with 24/7 margarita service.

Wiser heads than mine insist that it's misleading--if not altogether inaccurate--to conflate the pre-2000 insanity that infected the tech business with the burst of entrepreneurship that has created what we commonly refer to as the age of Web 2.0.

The encouraging news is that the public markets aren't playing along.

So far this year, venture firms have put a total of $455.5 million into 79 Web 2.0 deals. That's twice the amount invested during the same period a year earlier, according to a study released earlier this month by Dow Jones subsidiary VentureOne (click here for PDF).

Are we talking about the second coming of Pets.com or the next Google? Let's first step back and briefly take stock of what Web 2.0 is and what it is not. The Internet obviously has begun to reshape commerce and communications. Yet we're still very much scratching the surface of the possible while dreaming grand thoughts about the glories of the seemingly impossible. In this, the beginning of the second decade of the commercial Web, we're still waiting for the Internet to fulfill its promise. That challenge has a lot of people excited.

To its credit, Web 2.0 has moved the ball forward. Developers figured out how to seamlessly connect applications over the Internet. And that's important stuff, but the ensuing hype has taken on a life of its own. That's little surprise, considering how easily Silicon Valley gets carried away by fads.

So it was that some lucky start-ups found anxious venture capitalists to fund them or bigger companies to buy them out. The median venture investment in Web 2.0 companies jumped to $6.8 million in 2005 from $3.4 million in 2004, according to VentureOne. Through the first nine months of this year, the number so far is $5.9 million.

More power to them. Established technology companies seem incapable of creative thinking anymore. If they figure they can buy "cool," they deserve to wind up overpaying for what, at best, is only a piece of the bigger puzzle.

You won't find the big ideas that ignited breakthrough developments during this phase. With all due respect to their inventors, mashups don't represent the apex of Silicon Valley's creative genius. The truly exciting stuff still waits over the horizon. That's where things are going to get more interesting.

We can argue whether Google at $500 a share is worth it. But Google is a real business with a compelling business model in a market that the company dominates. Compare that with an online-publishing outfit called Real Girls Media Network, which earlier this week got $6 million in venture funding from 3i Group and WaldenVC.

In the press release announcing the investment, Real Girls Media said it wants to create "the leading online destinations that address the totality of women's lives, not just specific life events."

I honestly wish all concerned well, but that's an awfully iffy $6 million bet. Is it a portent that things are getting out of hand?

"I think there are really two important questions to ask," says Jessica Canning, the senior research manager at VentureOne: "Is there a bubble within Web 2.0 or a bubble within venture capital?"

So far, we haven't seen the latter. Would it be a huge surprise if we see the former? To date, the available numbers suggest that medium valuations of Web 2.0 investments are not getting out of hand--or at least not just yet. The encouraging news is that the public markets aren't playing along. I think that's mainly because the investment banks are petrified of again getting linked to another Ponzi scheme.

But now that the VC community's got the scent, can it restrain its worst impulses? When it comes to piling on, these guys are in a league by themselves. Remember, greed is good.

Maybe it's not a bubble--but we're getting close.

Biography
Charles Cooper is CNET News.com's executive editor of commentary.

More Perspectives

[ghostofitpast]

Another "New Economy?"

My own opinion is that the last bubble was inflated by a promotion of a "new economy" that, to borrow shamelessly from the title of Duncan Foley's new book, can best be called theological. For better or worse the "religion" of the "new economy" attracted enough of a congregation to keep the bubble inflating. Nevertheless, it did not take long for some "old economy" thinking, like the need to address supply and demand, kicked back; and my personal feeling is that the "revival" (to continue the theological metaphor) of that thinking put the pin in the bubble.

So where are we today? Well, I know where *I* am. I am sitting at my desk trying to recover from a presentation I heard yesterday afternoon at which I would be happy for a nickel for each time I heard the phrase "value proposition!" If the first bubble was inflated by playing fast and loose with the concept of value and then founding an economic theology that sanctioned those games, then I would say that the history is repeating itself; and the best thing we can do is get our heads around economic basics before we lose the farm again.

In this respect I was very glad to see Robert Solow take on the task of reviewing Foley's "economic theology" book, because Solow has a clear head for basics and knows how to talk about them to non-economists. The most important sentence in his review is the following: "Modern economics dispenses with the notion of 'value' altogether, and deals only with ordinary, observable market price." In other words "value" is too abstract a concept to mess with the nuts-and-bolts practices of economics; so stick to the concrete phenomena you can observe.

Now I remember during the first bubble inflation having to sit through presentations about "price points;" but these were little more than "fictions of convenience:" PowerPoint slides that you had to prepare to convince the VCs that you had done your homework diligently. What was missing was even a remote speculation on the relationship of what you would actually be delivering and what your expectations were for compensation for delivering it. I do not see much of that kind of talk in the Web 2.0 world; and, since the VCs are probably still operating on a one-out-of-ten success model, it would not surprise me to learn that they are not particularly interested in that talk. So my guess is that the bubble will continue to inflate until there is a critical mass of concrete demand that bumps into not-so-concrete supply; and that will be when the pin bumps into the bubble!

[Hoser McMoose]

And the "Worst Buzzword of the Year" award goes to...

"Web 2.0"

[timoteo21]

Wealth has to go somewhere

Now that the run up in real estate prices is over, another tech
bubble is what to expect, given the increasing concentration of
wealth in the hands of a few. Google will profit in the short
term, as more investment dollars are spent advertising new
products. Overpaying for YouTube was a brilliant move, to
stimulate exactly the kind of environment where Google will
thrive: a vast smorgasboard of sites competing to attract
enough eyeballs to be bought by Google. So investors will
shuffle dollars among themselves for a few more years until it
becomes clear that there are not enough dollars in the hands of
consumers to generate real returns.

[Kenschr]

Google & Bubble!!! No way...

What are you talking about.. the intristic value of Goog as calulated by classical DCF financial methods..re Warren Buffet.....and value investing guru..is $906 per share..(see valuepro.net).it's not even close to that yet

VCs may in general be throwing money at deals without any chance of making it but don't confuse that with a real business GOOGLE....It's just an investing model which is over subscribed and VCs know it..only the good ones should & will survive..the system will work this out..