Bubble redux?

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.

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.