Silicon Valley Buying Spree: A Tech Bubble, Or Strategy At Play?

Enlarge this image toggle caption David Ramos/Getty Images David Ramos/Getty Images

Over the past few months, the country's biggest technology firms have spent billions buying startups. Are we watching another tech bubble about to burst?

In this year's first quarter, Google and Facebook, alone, announced deals worth more than $24 billion on little companies that have almost no revenue. Those deals seem to have spooked Wall Street; last week, technology stocks plunged and the tech-heavy Nasdaq index fell nearly 1.2 percent Monday.

Enlarge this image toggle caption Jae C. Hong/AP Jae C. Hong/AP

The case that this is a bubble is easy to make. Just take a look at Oculus VR. Facebook recently spent $2 billion for this company, which makes a virtual reality headset called the Oculus Rift. Oculus is barely 2 years old and still doesn't have a consumer product — and using its headset can leave some people feeling nauseous.

Peter Hawley, the founder and CEO of Red Robot Labs, a gaming company in Mountain View, Calif., takes me on a virtual reality tour of a villa on the Italian coast via the Oculus Rift.

Butterflies flutter in front of my nose. I see ocean waves breaking against cliffs in the background as I float through the scene. I put my head between my legs and I can see behind me, but the world flips upside down and I realize that this virtual me doesn't have any legs.

Suddenly, I need to sit down.

"How do you feel?" Hawley asks. I feel queasy.

"Already?" he says. It's not my proudest moment, though this is definitely the one that makes people feel ill, he says.

Virtual reality is a powerful thing and can be powerfully disorienting. Actually, that's a pretty good metaphor for the tech economy right now.

"We live in this insane bubble here, where these valuations are just beyond the comprehension of some," Hawley says.

When he says "bubble," he's not talking about an investment bubble. He's referring to a specific place: Silicon Valley, where the big companies worth hundreds of billions generate billions of dollars in profit each quarter.

"I just mean bubble in terms of understanding, what does it mean for a company like Facebook to spend 2 billion?" Hawley says. "And to look at what does that actually mean in terms of cash and stock breakdown. And what does that mean to them as a large company?"

Hawley is a virtual reality optimist. He says Facebook may have bought itself a powerful new platform. In five years, people might look back and say that $2 billion for Oculus was a steal.

He says that for Facebook, this amounts to a small bet. But, really, only people living inside the Silicon Valley bubble can see $2 billion that way.

The sizes of some of the recent deals here have left even seasoned Silicon Valley insiders rubbing their eyes.

"I must admit when I first saw the WhatsApp valuation I thought I needed to get bifocals," says Peter Nieh, a venture capitalist at Lightspeed. "I thought I must have missed a decimal point."

In February, Facebook bought WhatsApp, which offers a free text messaging alternative, for $19 billion. At the time, Nieh was thinking WhatsApp was worth maybe $1.5 billion or $2 billion.

When I first saw the WhatsApp valuation I thought I needed to get bifocals. I thought I must have missed a decimal point.

It's not like Nieh has been sitting on the sidelines. He's an investor in Snapchat and Nest, which Google bought for $3.2 billion in January.

"Tech has become a more pervasive part of our lives, so it does make sense that the valuations for tech companies should increase. It's to what extent?" Nieh says. "It seems that some of these valuations are very frothy."

Google and Facebook have gotten into bidding wars with one another, driving the value of some promising startups to stratospheric heights. The tech giants' own soaring stocks have made all this seem affordable.

It all encourages big risk.

"There will be some spectacular failures," says Charley Moore, a technology attorney who has lived through three booms and busts here. He says that bubbles are not such a bad thing.

"It's really times like this that don't come around every day, that you see the kind of experimentation and risk-taking that, really, Silicon Valley is known for."

After all, Intel spent millions in the 1970s trying to build a smart watch; it was a total failure. But other bets the company made at the same time helped build a multi-hundred-billion-dollar business.