In the short term, there will be pain in Silicon Valley. Start-ups will have to survive 2009. Layoffs will be in fashion: "You didn't do a layoff? What's wrong with you?"
Venture capitalists will be hit just as hard. Their investors--the endowments, the pension funds and others--are hurting. The entire portfolio of the California Public Employees Retirement Fund, for example, a major investor in venture funds, is down 20% and needs to raise capital. Cash will be scarce in 2009, no matter if you're a pension fund, a VC or a start-up. Wall Street is broken.
But Wall Street has been broken for eight years now, as far as Silicon Valley is concerned. Alan Patricof, a legendary venture capitalist, recently remarked: "We no longer invest with the idea of taking our companies public. If they do [IPO], it's an accident."
He's right: These days, IPOs are an accident. Since 2002, there have been just 351 IPOs out of 19,300 VC-backed companies--fewer than one in 50. If the notion of an IPO seems so 1990s, well, it is. Just two years in the late 1990s, namely 1996 and 1997, saw more IPOs than the last eight years (2001 to 2008) combined. The ratio of mergers and acquisitions to IPOs has gone from roughly 1:1 from 1996 to 2000 to 6:1 during 2001 through 2008. The National Venture Capital Association has all the grim statistics.
Given this lack of IPOs, VC returns have plummeted and the average VC is likely to lose money. But the impact is much bigger than the VC business.
Wall Street has been unwilling to risk investing in relatively small, rapidly growing, unprofitable technology companies. A $100 million high-growth revenue company is no longer an interesting candidate for an IPO. Being acquired is the only logical endpoint. Thus the $100 million company that could have potentially become a $1 billion company with some nurturing and capital instead becomes a piece of some large company. With its fate no longer in its hands, the company loses its key management and its vision, and in most cases, is eventually forgotten.
For example, a company like Amazon.com (nasdaq: AMZN - news - people ), which went public in 1997, could never have had an IPO in this environment. Instead it would have become a part of Walmart and likely would have been shut down during the tech bust. In today's market, you need to be a Google (nasdaq: GOOG - news - people ) to make an IPO. For most companies, that's just too high a bar.