Excitement over a new class of programs that help consumers customize how they use the Web has fueled fears in the Internet industry that a second dot-com investment bubble may be taking shape.
But new data on U.S. venture capital investments from Thomson Venture Economics suggests that the actual amount of Internet investments is falling, despite the wave of interest in what industry insiders refer to as "Web 2.0."
Financing of pure-play Internet companies dropped to $596.3 million during the third quarter from $840.5 million in the second quarter of this year and compared with $641.4 million in the third quarter of 2004, according to Venture Economics.
In all, third-quarter U.S. venture capital investments of $5.26 billion fell 13 percent from $6.07 billion during the second quarter of 2005 but rose 13 percent from $4.65 billion in the third quarter of 2004, according to Venture Economics.
Despite the lack of hard data, Silicon Valley is abuzz with anecdotal talk that an investment bubble is looming.
Hot topics are anything related to social networking, which allows people to collaborate more effectively on the Web, and dynamic technology that allows data from one site to automatically power features on other sites.
Such programs are inspired by the success of Google Inc.'s Google Maps and Yahoo Inc. 's Flickr photo sharing site.
"There is a boomy kind of feeling in the room again," Silicon Valley venture capital guru Vinod Khosola told a packed ballroom at O'Reilly's second annual Web 2.0 conference this month, a major Internet industry event in San Francisco.
However, quarterly fluctuations disguise the overall stability occurring within the U.S. venture industry, according to survey released on Tuesday by the National Venture Capital Association, PricewaterhouseCoopers and Venture Economics.
"Over the last 12 quarters, we've been between $4 billion and $6 billion each quarter and in (the third quarter) we're effectively right in the middle of that band," Mary MacDonald, Venture Economics' vice president of investment banking, told reporters on a conference call to discuss quarterly trends.
Investments in information technology and communications accounted for $2.86 billion or 54 percent of the latest quarter's total, led by $1 billion in software financing and $605 million in telecoms. Life science investments attracted $1 billion and medical devices $558 million, the study found.
STABILITY OR BUBBLE?
Among venture capitalists, perceptions of the industry's relative stability depend on the focus of one's investments.
The U.S. venture capital industry is on track to invest around $23 billion in 2005, the highest level in four years, but that's half the level of 1999 and four times less than the peak year of 2000.
"There has been a consistency and predictability in the numbers that gives you great confidence that these markets are not in turmoil as we saw the last number of years," said Michael Greely, managing general partner of IDG Ventures in Boston.
The tech bust of 2001 and 2002 created an overhang of uninvested capital that has only recently begun to clear up.
"As a venture investor, the sentiment now is that we can finally begin to make money again," said Greely, who sits on the board of several life science and information technology firms, in a conference call with reporters to discuss the study.
Dan Janney, a general partner at Alta Partners in San Francisco, said he is seeing an acceleration in financing for new drug development resulting from the mapping of the human genome finished in 2000.
"We're seeing known parties out there making prudent investments in technology, which is a great sign," Janney said. "There's a stability in the market, which is important."