Web 2.0 remains a hot topic in investment circles, with many believing that the consumer Internet category is grossly overfunded.

But now there are some preliminary signs that investors in privately held Internet companies may be taking a bit of a breather -- especially in the Seattle area.

In the first half of this year, only three Web 2.0 companies in the state received $24.7 million in funding, according to a report to be released Monday from Dow Jones VentureOne and Ernst & Young.

That compares to seven Web 2.0 startups that raised $60.7 million last year and 11 companies that raised $72.6 million in 2005. (The three Web 2.0 startups backed in the first half of the year differs from my deal tracker. I am aware of at least six Seattle-area Web 2.0 companies that have raised capital: Smartsheet.com, Atomic Moguls, Imagekind, Shelfari, InfiLearn and PeerWisdom. Of course, the definition of Web 2.0 is open to debate.)

Nationally, investments in Web 2.0 startups -- defined as those companies using Web-based technologies to create business models around user-generated content, social networking and collaboration -- were relatively flat with 67 deals and $357 million invested. The San Francisco Bay Area remains ground zero of the Web 2.0 world, but the dollars also are slowing there. Just 25 deals worth $90.4 million were recorded in the first half of the year, an investment pace that is well off the $413 million that was invested last year.

Source: VentureOne

Jessica Canning, director of global research at VentureOne, noted in a press release that "we may be seeing a plateau in the number of Web 2.0 companies investors are willing to back in the U.S."

That could be a good thing, according to some who have cast a wary eye on the hundreds of new Internet startups that have received funding in the past two years.

Tom Simpson, founding partner of Northwest Venture Associates, recently told the P-I that venture investors are funding too many Web 2.0 startups that have little chance for success.

"Does the world really need yet one more early-stage technology fund focusing on Web 2.0? No," said Simpson.

But Terry Drayton, an angel investor and founder of Ramp Group, a Bellevue technology consulting firm, believes there are still some intriguing ideas percolating in the Web 2.0 arena.

"Although we are back to valuation numbers and other things we saw in the late 90s, it just feels a lot different," said Drayton, the former chief executive of HomeGrocer.com. "We are not seeing as many dumb things."

Drayton said there are plenty of copycat or "me too" ideas floating in the market, but for the most part he has been encouraged by the quality of Internet startups in the Seattle area.

"In most cases, we are seeing pretty solid stuff that is well thought through," said Drayton, adding that there are millions of micro markets that entrepreneurs are now trying to target.

If entrepreneurs can create Web sites with relevant content that targets those niche markets, Drayton believes they can be successful.

"It is pretty easy to monetize traffic," he said. "You don't have to invest $25 million and then hope there is something there. Now, you frickin' stick it up quickly and monetize it right away."