Fears of Dot-Com Crash, Version 2.0

Investment in Internet companies has climbed so steeply since the dot-com crash of 2000 that some Silicon Valley veterans worry that too much money is again pouring into too many unproven, unprofitable ideas -- setting the stage for another high-tech shakeout.

Watching venture capital firms invest hundreds of millions of dollars in new Web companies last year, longtime Internet executive Richard Wolpert branded the upswing "a mini-bubble." But "about a month ago," he said, "I started dropping the word 'mini.' "

In the first three months of this year, venture investors funded 761 deals worth about $5.6 billion. That's up 12% from the same period last year and the highest first quarter since 2002. One sector in particular is heating up fast: online media and entertainment.

The $254.9 million invested in blogging and online social networks in the first half of the year already exceeds such spending for all of 2005, according to research firm Dow Jones VentureOne. The $156.3 million pumped into online video is on pace to surpass last year's investment.

The popular success of MySpace, a social networking site bought last year by Rupert Murdoch's News Corp. for $580 million, and YouTube, a video sharing site, has inspired scores of imitators. In online video alone, there are nearly 180 new companies -- not to mention big players such as Yahoo Inc., Google Inc. and CBS Corp. -- vying to be the next YouTube.

There's also VideoEgg and Video Bomb, Blinkx.TV and Blip.TV, Guba and Grouper.

But MySpace and YouTube, the industry leaders, have yet to make big bucks, and some skeptical investors wonder what hope there is for all of the copycats.

"YouTube has been a cultural phenom," said Mike Hirshland, a general partner with Polaris Venture Partners.

"But how many YouTube knockoffs have been funded in the last six to nine months? The market has capacity for a certain number of successful winners. Whether it's one, two or, if it's really exciting, three -- you can debate. But eight?"

Venture capitalists say they're being more responsible this time. Alan Patricof, who provided early funding for America Online, Office Depot Inc. and Apple Computer Inc., said the investment community probably wouldn't reach the late 1990s level of irrational exuberance.

But, he added, "it certainly is the beginning of a heightened frenzy developing."