A bust may not matter as much as it did in 2000, argues John Naughton

Among the things that lead normal, well-balanced people to conclude that the IT industry is crazy are the valuations at which internet companies are launched on the sharemarket and the prices these companies pay to acquire apparently minuscule start-ups.

Think, for example, of the US$104 billion valuation of Facebook when it launched in May 2012. Or the US$19 billion that Facebook paid to acquire WhatsApp in February.

And then there's last week's flotation of the Chinese internet firm Alibaba in New York, which valued the company at US$200 billion ($246.6 billion).

These are not just telephone-book numbers, but astronomical ones. And not surprisingly they are leading some people to wonder if we're in the middle of another tech bubble like the one that spectacularly popped in 2000.

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These fears were given a boost by a report published last month by PricewaterhouseCoopers that showed that United States venture capitalists are pouring increasing amounts of money into tech companies.

This raises two questions. First, is history repeating itself? The answer is no, because history never really repeats itself. All booms have some generic features in common, but the specific circumstances of each boom are different. In the first internet bubble, for example, much of the money was blown on buying servers, renting offices and trying to buy market share in improbable or nonexistent markets. In the current boom, instead of buying servers, start-ups rent computing time on Amazon's Elastic Compute Cloud service; their "offices" are often virtual and they're not spending fortunes on advertising. In fact, they're not paying for advertising full stop. So even if things were to go belly up there's less at stake.

A more interesting question is: does it matter if we're in another bubble? For individual investors, obviously the answer is yes. But for society as a whole, perhaps not. As William Janeway pointed out in his splendid book on innovation, the irrational exuberance that characterises bubbles may also be beneficial in that they generate technologies that will prove significant in the longer term.

If one wanted to be critical, the most annoying thing about the current bubble is the way the visions and ambitions of start-up founders seem to have narrowed. Many of them claim, of course, that what they want to build is a company that in the long-term will transform the world or disrupt a particular market. In actual fact their strategy is to create a product or service that is sufficiently interesting or annoying to induce Google, Amazon, Facebook, Yahoo or Microsoft to buy the upstart venture.

The poster child for this is WhatsApp, a fine company with a viable business model, run by a chap who fervently declared his resolve to build a great, sustainable enterprise that treated its users well. And he doubtless believed that right up to the moment Facebook offered him US$19 billion.

At the end of the day, though, what's worrying is that state funding for the kind of long-term, fundamental research that is needed to produce the technologies of tomorrow has been shrinking. The current wave of innovation and economic development enabled by the internet has only come about because 60 years ago the US Government funded the project that produced first the arpanet and then the internet.

Private enterprise would undoubtedly have produced computer networks, but it would not have created the free and open platform for "permissionless innovation" that we got as a result of public investment. And we would have all been poorer as a result. -- Observer