(MONEY Magazine) – Sure, the likes of Yahoo and Amazon.com are all the rage this year on Wall Street. But venture capitalists appear to be over their online obsession. According to the most recent MoneyTree Survey--a report tracking which private companies bleeding-edge investors have been betting on--biotech and medical equipment firms are the next big thing.

Although overall VC funding in the third quarter dipped 8% from the second quarter, investments in life sciences increased 14%, to $1.2 billion. That's 30% of all new investments, the highest share of venture funding for the sector in six years. For 2003 biotech and medical equipment firms have already sucked up $3.2 billion in venture money.

Whenever the VCs latch on to a sector this enthusiastically, it's a good time to ask: Do we have a bubble? Maybe. Looking at the biotech firms that are already public, the Amex Biotech index is up 38% so far this year vs. the S&P 500's 20% gain. And companies are betting that there's more where that came from: The intial public offering pipeline is chock full of high-tech health-care companies. Seven of the 32 companies that have filed for IPOs since the beginning of September are either biotechs or medical equipment firms.

THE BULLS' CASE We're already hearing that this is not really another bubble--which usually means it is. In a conference call announcing the MoneyTree results, Tracy Lefteroff, global managing partner of private equity and venture capital for PricewaterhouseCoopers, said biotechs will benefit from true growth drivers such as an aging population. That may be true.

In the same call, Jesse Reyes of Thomson Venture Economics added that because of massive start-up costs, there shouldn't be as many new biotech firms as there were Internet start-ups in the late '90s. So you might conclude that with a higher bar for firms to get over, investors are less likely to end up with the biotech equivalent of Pets.com. This may also be true.

But biotech is notorious for speculative stock crazes. Biotechs skyrocketed in 1999 and early 2000 during the genomics hype and then crashed. Celera and Human Genome Sciences are still trading more than 90% below those peaks. "You do tend to see a lot of VCs flocking to hot areas, which is no different from investors in the public markets," says Gregg Adkin of Valley Ventures, a Phoenix venture-capital firm that has about a third of its funds in life sciences.

BOTTOM LINE Of course, venture capitalists--if they're any good--have the advantage of getting in on the ground floor. For the rest of us, biotech is already touching penthouse prices. Unprofitable Millennium Pharmaceuticals (MLNM) has more than doubled this year. Genentech (DNA), trading at 57 times 2004 earnings estimates, is up 156%. That may or may not be a bubble--but it's no bargain. --PAUL R. LA MONICA