Bubble Watch: Is Web 2.0 Ready for Puncture?

The Silicon Valley venture capitalist Michael Moritz is kinda-sorta the West Coast version of New York’s own Steve Rattner. Like Rattner, who (famously) was on the journalistic fast track at the New York Times before he (even more famously) jumped the rails for investment banking back in the early eighties, Moritz, at almost precisely the same time, was a writer on the rise in the San Francisco bureau of Time magazine before he took the plunge into high-tech finance. In the nineties, Moritz, a wry Welshman, bankrolled such monster Web start-ups as Yahoo, PayPal, and Google; according to the latest Forbes 400 list, his net worth stands at $1.3 billion. So Moritz is Rattner—only richer.

I mention all this because the other day, I found myself out in Northern California at the annual Web 2.0 Summit, lobbing questions at Moritz onstage. That morning, the Times had run a front-page story that was a kind of curtain-raiser for the conference, full of spicy tales of sky-high start-up valuations and the general-purpose giddiness now rampant in the Internet business, the thesis of which was summed up neatly by its lead: “Silicon Valley’s math is getting fuzzy again.”

I asked Moritz what sort of piece he would have done, were he still a hack, to capture the industry’s gestalt. Cheekily, Moritz replied that he would have written about the irrelevance of such stories: Who reads newspapers anymore, anyway? (Touché!) Eventually, though, Moritz got around to opining on the bubbliness of the second-generation Web boom. “The great news for me about these times of enthusiasm is that inevitably there’s a lot of bedlam, undoubtedly there’ll be carnage, there’ll be all sorts of carcasses strewn across the road,” he said. “But there will also be a handful of companies that will emerge to become very significant. And that’s what working and living and investing in Silicon Valley has always been about.”

Now, to skeptics, Moritz’s answer will sound like familiar Valley boilerplate—or the purest brand of bullshit. But to me, it says much about why the debate over whether Web 2.0 is a bubble has been so inconclusive and incoherent, conducted as if one side were speaking Swahili and the other barking like a dog. It’s also revealing about the yawning gulf that still divides the two coasts with regard to high-tech moneymaking. And about why, for all its many and manifest virtues, New York remains such a sad-assed backwater when it comes to the Internet industry.

It doesn’t require a Mensa-level IQ to make the case that the Web 2.0 boom is in fact a bubble. There’s the glut in venture capital: $3.4 billion invested in fledgling Internet firms in 2007, the most torrid pace since the height of the Web 1.0 mêlée. There are those lunatic valuations: A year ago, the burgeoning social-networking outfit Facebook was nearly bought by Yahoo for $1 billion; today, the price tag is $15 billion, an eye-popping number that did nothing to dissuade Google and Microsoft from bidding richly, fervently, to buy a tiny sliver of the company—a competition that Microsoft finally won last week. There’s the frothy run-up in the nasdaq, which has lofted Amazon’s stock back to its all-time high, has inflated Yahoo by almost 30 percent this year, and is rapidly propelling GOOG toward $700. And then there’s the flood of derivative, dum-dum start-ups inducing a severe case of dot-com déjà vu. To wit: MyCatSpace.com.

The nature of bubbles, of course, is that they pop. And today there’s no shortage of folks who believe that the end of this one is nigh. Among the doomsayers is the former Merrill Lynch analyst–cum–Eliot Spitzer whipping boy Henry Blodget, who’s lately resurrected himself with a smart new Web publication, Silicon Alley Insider. For Blodget, who headlined a recent blog post “Dear Internet Industry: Brace for Hard Times,” the signs of a looming Web recession are everywhere: in the meltdown of the mortgage market, which could hammer online advertising; in the slowdown in broadband adoption rates; in the rash of me-too competition among start-ups. Howard Lindzon, the founder of Wallstrip, worries that “the deals and rises are too easy and too loose. Too much back-patting and knuckle fives.” Even my friend Fred Wilson, the Über–NYC VC, has started fretting about “the coming downturn.”

All of these are clever dudes. And they’re hardly congenital bears. Quite the contrary. But the interesting thing that ties them together, along with most of the other prophets of implosion, is that none of them resides in Silicon Valley. Indeed, at the Web 2.0 shindig, in three days I couldn’t find a single digital Jeremiah in the bunch.

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