Another tech bubble?

Her statement is akin to an official US warning of a potential tech bubble. It comes as Nasdaq’s biotech index has more than tripled in five years — after being almost unaffected by 2008’s financial crash — while the exchange’s social media index has surged 44 per cent in two years. In the second quarter, venture capital investment values almost doubled compared to a year ago.

There are two lines of thinking on the stocks. On the one hand, yes, the companies’ valuations on the stock market are huge compared to the money they actually make. A price-earnings ratio between 10 and 17 is generally considered normal. However, USA Today has already listed an example batch of nine small biotech firms valued between 87 and 233 times their earnings. According to a Bloomberg estimate, the figure for Twitter is around 881. Some social media startups have practically no earnings at all.

On the other hand, however, high price-earning ratios could be backed by expectations of phenomenal future growth. Both biotech and social media are likely poised for such expansion.

The crucial point is whether the stock prices will be able to fluctuate as usual as they are hit by corrections, or will crash instead. Institutional investors argue that the market is safe for now because most of the money has come from institutional investors. Whereas in 1999, they say, regular people were investing in dot-com stocks, pumping up prices with ill-informed speculation.

In the end, the story may diverge for biotech and social media. Many biotech startups aim to eventually make money as traditional businesses — by selling their innovations and products. The firms that have been listed as having high price-earnings ratios variously manufacture novel proteins to cure rare diseases or employ living organisms for drug production. But social media’s plans are frequently far more cloudy, as few social media startups in fact ever make money: they get bought out instead.

There have been billion-dollar venture capital valuations for tech companies on an almost weekly basis this year. Pinterest was valued at $5 billion, Airbnb at $10 billion, and Uber at $17 billion.

These compare to Facebook being valued at $500 million in 2006 — and making front-page headlines for it. There has clearly been a significant inflation in values, without a commensurate advance in revenue generation.

The market for social media ventures has had several hiccups already. Early this year, hedge funds pulled out of firms as related stock markets dipped.

Meanwhile, tech journalists in San Francisco are saying they are being inundated with invitations to schmoozing dinners as well as offers of gifts and — in some cases — free stocks. Those who were around in 1999 say it feels awfully familiar. Those who weren’t may end up being foolish enough to fall for the enticements: another cyclical bout of exuberance that could bring down the economy.