PIER 38 is a vast, hangar-like structure, perched on San Francisco's waterfront. Once a place where Chinese immigrants landed with picks and shovels, ready to build railways during California's Gold Rush, the pier is now home to a host of entrepreneurs with smartphones and computers engaged in a race for internet riches. From their open-plan offices, the young people running start-ups with fashionably odd names such as NoiseToys, Adility and Trazzler can gaze at the fancy yachts moored nearby when they aren't furiously tapping out lines of code.

“The speed of innovation is unlike anything we've seen before,” says Ryan Spoon, who runs Dogpatch Labs, an arm of a venture-capital firm that rents space to young companies at Pier 38. Like many other entrepreneurs, the tenants would love to follow firms such as Facebook and Zynga, a maker of hugely popular online games including Farmville, that have been thrust into the internet limelight in the space of a few short years.

Some of the most prominent start-ups are preparing for stockmarket listings or are being bought by big firms with deep pockets. On May 9th LinkedIn, a social network for professionals that took in revenue of $243m last year, set the terms of its imminent initial public offering (IPO) on the New York Stock Exchange (NYSE), which value it at up to $3.3 billion. The next day Microsoft said it was buying Skype, an internet calling and video service, for $8.5 billion (see article).

Other firms such as Groupon, which provides online coupons to its subscribers, are likely to go public soon. The return of big internet IPOs, rarities since a bubble in telecoms and internet stocks burst in 2000, and the resurgence of large mergers and acquisitions among technology firms is dividing opinion in the industry. Some veterans see a new bubble forming in the valuations of start-ups and a handful of more mature firms such as Twitter, which is still hunting for a satisfactory business model five years after the first tweet. More sanguine voices retort that many young companies have exciting prospects and that there are plenty of corporate buyers, such as Microsoft, with the money and confidence to snap up older internet firms still in private hands.

Technology, finance and China

Yet both sides agree that the internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. Second, a new breed of rich investors has been keen to back those ideas. And, third, this boom is much more global than the last one; Chinese internet firms are causing as much excitement as American ones.

Start with technology. Moore's law, which holds that the number of transistors that can be put on a single computer chip doubles roughly every 18 months, has continued to work its magic, leading to the proliferation of ever more capable and affordable consumer devices. Some of today's tablet computers and smartphones are more powerful than personal computers were a decade ago. IDC, a research firm, estimates that around 450m smartphones will be shipped worldwide this year, up from 303m in 2010.

Moore's law also underpins the growth of “cloud” services, such as Apple's iTunes music store, which can be reached from almost any device, almost anywhere. Such services are hosted in data centres, the factories of the cloud, which are crammed with hundreds of thousands of servers, whose price has plunged as their processing power has soared. Everything is connected ever faster, with ever fewer wires.

These technological trends have given rise to new “platforms”—computing bases on which other companies can build services. Examples include operating systems for smartphones and social networks such as Facebook and LinkedIn. Some of them are used by hundreds of millions of people. And the platforms are generating oceans of data from smartphones, sensors and other devices.

These platforms are vast spaces of digital opportunity. Perhaps the most striking example of the innovation they have sparked is the outpouring of downloadable software applications, or “apps”, for smartphones and computers. Apple's App Store, a mere three years old, offers more than 300,000 of them. Users of Facebook are installing them at a rate of 20m a day. Services such as Skype have also benefited from the spread of smart devices and lightning-fast connectivity.

Some excited people have likened this technological upheaval to the Cambrian explosion 500m years ago, when evolution on Earth speeded up in part because the cell had been perfected and standardised. They may be exaggerating. Even so, creating a web firm has become much easier. By tapping into cheap cloud-computing capacity and by using platforms to reach millions of potential customers, a company can be up and running for thousands of dollars rather than the millions needed in the 1990s.

Guardian angels

Thanks to the boom's second driving force, finance, these companies have no shortage of eager backers. Although too small to interest many venture-capital firms, they are being fought over by wealthy individual investors, or “angels” in the venture industry's jargon. Many of these financiers made their fortunes during the 1990s bubble and are eager to put their know-how and cash behind today's tiny companies.

Some “super angels”, such as Aydin Senkut, a former Google employee who runs Felicis Ventures, and Mike Maples, a software entrepreneur who oversees a firm called Floodgate, are occasionally making bets comparable to those of conventional venture funds, which gather and invest money from a wide range of institutional investors. Individual investments of up to $1m are not uncommon. Sometimes angels are clubbing together to provide young firms with even larger sums.

Their cumulative impact is staggering. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009. That is not far off the $22 billion that America's National Venture Capital Association says its members invested in 2010. Much of the angels' money has gone to consumer-internet firms and makers of software apps.

The financing of more mature tech start-ups has also changed. Elite venture-capital firms such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers have raised billions of dollars in new funds in the past year or so. Some of this money has been pumped into “late-stage” investments (eg, in Twitter and Skype), allowing companies to remain private and independent for longer than used to be the norm.

Venture firms are not the only ones with internet companies in their sights. Some would argue that it was DST, a Russian holding company now renamed Mail.ru, and a related investment fund, DST Global, that set off the boom. In 2009, when most investors in America were sitting on their hands, both poured hundreds of millions of dollars into fast-growing prospects there such as Facebook and Groupon. Those investments seem likely to pay off handsomely.

American hedge funds, private-equity firms and even some mutual funds have followed, falling over one another in pursuit of the shares of popular internet companies. Investment banks including Goldman Sachs and JPMorgan Chase have also set up funds to help rich clients buy stakes.

Their task has been made easier by the advent of secondary markets in America, such as SharesPost and SecondMarket, that allow professional investors to trade the equity of private companies more efficiently. They have also made it simpler for employees and angel investors to offload some shares—and have enabled the world at large to observe a remarkable rise in valuations (see chart 1).

American consumer-internet companies have not been the only beneficiaries of this flood of cash. The boom's third driving force is the rapid globalisation of the industry. Europe, which has at long last developed an entrepreneurial ecosystem worthy of the name, is home to several impressive firms. These include Spotify, an Anglo-Swedish music-streaming service with more than 10m registered users, and Vente Privée, a French clothing discounter with annual revenue of some $1 billion.

Much more striking, however, is that the latest round of euphoria involves emerging markets that were mere spectators during the last one, above all China. The country boasts not only the world's biggest online population, but also its fastest-growing. The number of internet users there will rise from 457m last year to more than 700m in 2015, according to the Boston Consulting Group (BCG). And the Chinese are no longer mostly playing games, but are diving into lots of other online activities, notably shopping. Between 2010 and 2015, predicts BCG, China's e-commerce market will more than quadruple, from $71 billion to $305 billion—which could make it the world's largest.

Such forecasts have stimulated plenty of venture capital, both foreign and domestic. Albeit with a dip in 2009, the amount raised by Chinese venture funds has grown sharply, rising from nearly $4 billion in 2006 to more than $11 billion in 2010 according to Zero2IPO, a research firm. The sum invested increased from $1.8 billion to nearly $5.4 billion. Much of this went into internet start-ups.

Investors have also been desperate for shares in Chinese companies listed on American stock exchanges (see table). Since the start of the year the share prices of the biggest of these firms have risen by more than a third, according to iChina Stock, a website. Baidu, China's largest search engine, has seen its share price climb from about $60 to $150 in the past 12 months, taking its market capitalisation to nearly $50 billion. Tencent, which makes most of its money from online games, is worth about the same. Both are among the world's top five internet firms by stockmarket value. The ten biggest Chinese companies have a combined worth of $150 billion, not much less than Google's.

They tend to sparkle on their debuts. When Youku, China's largest online-video company, listed its shares on December 8th its stock jumped by 161%, the biggest gain by a newcomer to the NYSE for five years. The share price of Dangdang, an online retailer floated on the same day, almost doubled. And on May 4th Renren, a social network, saw its share price rise by 29% on the first day of trading, though it has fallen back almost to where it started.

The experience of Chinese firms in America has encouraged other emerging-market internet companies to consider IPOs there. On the day LinkedIn revealed the terms of its offering, Yandex, a Russian search engine, said it would soon raise $1.1 billion by listing its shares on the tech-heavy NASDAQ stockmarket.

Those who think that talk of a new tech bubble is misleading point out that firms such as LinkedIn and Renren have proven business models and healthy revenues. Many internet firms that went public in the late 1990s could not say the same. Moreover, the price-earnings multiples at which other public companies in the technology sector are trading are nowhere near as frothy as they were before the last bubble burst in 2000. That should limit excesses in valuing private firms.

Bubble in the making?

This has led some venture capitalists to argue that 2011 may be more like 1995 than 1999: if a bubble is inflating, it is a long way from popping. So investors who shun internet firms now may be missing a great chance to mint money. Jeffrey Bussgang of Flybridge Capital Partners, a venture firm, notes that venture funds raised between 1995 and 1997 enjoyed stellar returns.

Others point to signs of bubbliness. For instance, some start-up firms are dangling multi-million-dollar pay packages in order to tempt star programmers from Google, Microsoft and other big companies. They are chasing scarce skills when the broader technology industry is on a roll. The NASDAQ index may be far below the heights of March 2000, but it has bounced back from the global downturn; and the Federal Reserve Bank of San Francisco's Tech Pulse Index, which measures the vibrancy of America's tech industry, is near its peak of 11 years ago (see chart 2).

There are also signs of irrational exuberance among some investors. Color, a photo-sharing and social-networking start-up, has been reportedly valued at around $100m by venture firms, even though it has an untested product in a crowded market. Competition among angel investors has helped drive up valuations of social-media start-ups by more than 50% in the past 12 months. Financiers are sometimes skimping on due diligence in the scramble to win deals. In China, too, the purported worth of young firms has risen breathtakingly fast—to an average of $15m-20m in first-round venture financings, which is expensive even by Silicon Valley's standards.

The danger in all this is that investors lose sight of the risks to the value of internet companies. These are greatest in China. Competition there is intense and users are fickle. Moreover, Chinese firms must wrestle with thorny regulatory and political issues. The government has yet to shut down a listed web company and firms are usually masters of self-censorship. But any move against them could have broad repercussions for all Chinese internet stocks.

European and American internet start-ups do not face a similar threat. But they are still vulnerable to inflated expectations. “Every bubble is a game of musical chairs,” says Steve Blank, a former serial entrepreneur who teaches at Stanford. The trick is to sell or float companies just before the music stops and the bubble bursts. If some of the hopefuls of Pier 38 can do just that, they may one day be able to afford a yacht or two of their own.