Is the Tech Industry Going to Party Like It’s 1999?

Technophiles, set aside your New York versus Silicon Valley squabbling for a moment and stop hand-wringing over IPO-shy start-ups long enough to consider something potentially more dire: Is the current boom turning into a bubble?

In case you hadn’t noticed, tech is cool again in a way it hasn’t been since those halcyon days when dot-com entrepreneurs realized that people might actually be willing to share their credit card numbers online. This time around, it’s the intersection of smartphones and social networks that is creating a bubblicious glint in investors’ eyes. Union Square Ventures’ Fred Wilson warned of “unnatural acts” like entrepreneurs showing up to pitch meetings with lists of financial demands, and small teams getting valued at more than $30 million. GigaOm’s Om Malick thinks Google paying an engineer $3.5 million dollars not to defect to Facebook demonstrates a return to irrationality. And IA Ventures’ Roger Ehrenberg likens the influx of hobbyist angel investors, eager to jump into the overheated market, to the guys in Bubble 1.0 whose obsession was slapping “dot-com” onto just about anything and watching the dollars roll in. After all, no one wants to be the guy that missed investing in the next Facebook.

The warning signs are so pervasive that they even made their way onto last week’s episode of The Office when Ryan tried to explain why running out of cash for his start-up was no cause for alarm. “The first lesson of Silicon Valley is that you only think about the user, the experience, you actually don’t think about the money … ever.” Does the increasingly frothy market mean we’re doomed to repeat the mistakes of our tech ancestors?

Here’s what’s similar.
Like the late nineties, deal flow is up. More than 5,100 tech mergers and acquisitions were made so far this year, the highest since 2000. In New York City alone, venture-capital investment is up 22 percent over last year. “When I look at where we are right now, it reminds me so much of 1999 and frankly it scares me,” Wilson blogged yesterday, after looking at his own portfolio.

Back then, buzzwords like “e-commerce” were used without a clear idea of where the profits would come from or how big they would be. In the past few years, terms like social media,augmented reality, and location awareness have generated similar levels of hype. Once again, entrepreneurs are telling themselves, “If you build it, they will come” — delaying concerns about revenue in favor of growing a dedicated user base. Cool companies with happy users but no clear path to profitability are having an easy time finding money. For example, see Friday’s announcement that Tumblr, a start-up with “rocket-trail” growth but no defined revenue strategy, picked up an additional $25 million to $30 million in investment from its recent trip to Silicon Valley.

There are also some familiar faces back on the scene. Morgan Stanley’s star analyst, Mary “Queen of the Internet” Meeker, whose bullish research fell out of favor after the bust, resurfaced with another bullish prediction last week: advertising for mobile web would become a $50 billion business.

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