When venture capitalists scale back investing activities it can be very swift and leave many companies that are in the process of fund raising hung out to dry. Just ask anybody who was trying to close funding the fateful week of September 11, 2001 or even March 2000. I would argue that the shut-down of September 2008 was equally severe yet there are signs that this “VC Ice Age” has begun to thaw.

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Many are speculating that the year two thousand and nine represents a fundamental turning point for the venture capital industry. Some are arguing that the industry is in dire straits after years of poor performance. Others have argued that the math simply does not work for the industry’s current size.

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SplashCast Corp., which lets people watch television shows within social networking sites, has been unable to raise new funding and has decided to shut down.

In March 2008, the Portland, Ore.-based company announced $4 million in Series A financing led by Australian media and advertising veteran Mark Bayliss with participation from angel group Emergent Growth Fund.

“We demonstrated that premium content applications in Facebook and MySpace can be monetized effectively with high-end display advertising,” Mike Berkley, SplashCast founder and CEO wrote in a blog post announcing the decision. “But that final chapter in the company’s history came too late, given our inability to convince the VC community to bet on us.”

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David Hornik–a partner at August Capital Management LLC, which boasts raising the year’s biggest venture capital fund with its $650 million balanced-stage fund–weighs in on the challenges facing the VC industry, including what Union Square Ventures co-founder Fred Wilson has called “The Venture Capital Math Problem.”

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The big news out this week in the venture capital market is the launch of Andreessen Horowitz, a new $300 million venture capital fund co-founded by Marc Andreeseen, a tech visionary who founded Netscape Communications, the startup that triggered the Internet tsunami. Raising $300 million for a first time fund is an incredible achievement in today’s depressed capital-starved economy. How did Andreessen and his long-time business partner and co-investor Ben Horowitz pull it off?

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The competitive edge of the United States economy has eroded sharply over the last decade, according to a new study by a nonpartisan research group.

The report by the Information Technology and Innovation Foundation found that the United States ranked sixth among 40 countries and regions, based on 16 indicators of innovation and competitiveness. They included venture capital investment, scientific researchers, spending on research and educational achievement.

But the American economy placed last in terms of progress made over the last decade. “The trend is very troubling,” said Robert D. Atkinson, president of the foundation.

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The numbers are startling; one technology IPO last quarter, only six in 2008. Is innovation dead? Did Google/Microsoft/Cisco consume all the promising start-ups? Did Sarbanes-Oxley render IPOs too hard and costly? Yes, if you believe columnists, conferences and collective wisdom.

They’re wrong. IPOs aren’t popular because they are perilous. Choosing extra risk now is like stocking up on peanut butter energy bars during a salmonella outbreak. The downside is ugly. New “unseasoned” issues are like new car models, rife with unknown quirks. We know their lineage and plans, but the future is mostly hope and speculation. Hindsight shows that newly public companies are prone to err when first under the marketplace spotlight.

The question isn’t “why aren’t investors buying IPOs now?” but rather “why do investors ever buy IPOs?” The answer is that institutional investors, the principal IPO buyers, exist to take calculated risks. If convinced potential reward overcompensates for added risk, fund managers will belly up to the IPO bar and order a double. Conversely, when offered safer, appealing choices, investors will skip the umbrella drinks and opt for the single malts. These days, risk reminds us of Jagermeister shots: something that used to be fun.

However, unless entrepreneurs now dream of Hondas–not Ferraris–and unless these “damn the torpedoes” folks checked their aspirations in the umbrella stand, the IPO market will be back.

The process of going public is tougher than it used to be but it’s still an entrepreneur’s crowning achievement. Need proof? Name four famous tech company founders. How about Sergey, Larry, Steve and Bill? Now name four tech legends who sold out to Cisco (CSCO), Microsoft (MSFT) or IBM (IBM). OK, name one.

IPOs are proof that ideas and hard work create recognizable value. No other exit affords founders both the glory and the independence. More tangible reasons to go include the start-up promise to employees; “Work long hours for low pay today, and tomorrow you too can afford a Tesla.” There’s no guarantee of success, but if it’s realized, there is an agreement that it will be shared by all. An IPO is the deliverable on that deal.

Secondly, acquisitive growth companies often prefer shopping with stock over cash, but agreeing on private-stock value is difficult. Public equity is a better currency because of its undeniable, third-party valuation. Finally, Silicon Valley’s history proves that yesterdays’ IPOs fund seed capital for tomorrow’s innovators.

A healthy economy needs a robust IPO market, begging the question: With so few of late, are we up the creek? To the contrary, five pointers suggest when we emerge from the current mess; our IPO market may be healthier than it has been in a decade.

1. Sarbanes Oxley is good for IPOs. According to Morgan Stanley Research, over a 20-year period, north of 60 percent of technology IPOs trade below their offer price. High on the list of reasons why newly public companies flounder is their failure to heed the wisdom of Paul Masson; they sell before their time.

The distractions are enormous and expensive. It’s genuinely difficult to lay the rails while driving a bullet train. Natural business challenges are compounded by the Sarbanes Oxley albatross. Fine-point accountability requirements force order on the chaos inherent in rapidly growing companies, but unquestionably slow the journey to market.

At an average small company cost of $3.0m, SOX implementation takes a major bite out of profits. However, while this expense initially reduces calculable company valuable for those using current earnings to set the IPO price, over time, accountability reduces corporate risk and therefore should increase returns. In fact, if a company can’t afford the expense and hasn’t endured the hardship of thoroughly documenting its systems, is it really ready for the teachers’ retirement fund, corporate pension plan or other public investors? It was easier to go public before SOX but, for investors or issuers, was it better?

2. The demise of investment banks is good for IPOs. Today, we lambast investment banks because they earned it. Formerly sure-footed firms ran full speed into a bog they didn’t understand. Those whom Tom Wolfe once christened “Masters of the Universe” and “BSDs” have morphed into LSWs (little shriveled walnuts).

How does this help the IPO market? In the heyday, technology IPOs were shepherded by boutique investment banks focused on, and economically aligned with emerging growth companies. Those banks didn’t invent, sell or swap CDOs or SIVs. Rather, in the 1990s, following the wisdom of the day, they sold out to diversified, theoretically better-capitalized, larger banks. Those acquiring banks emulated Audrey, the man-eating plant from “Little Shop of Horrors,” demanding ever larger revenues to sustain their mass, leaving new issuers who generate small fees with little IPOs, an acronym of their own; SOL.

Now, with large investment banks hanging with the pterodactyls, there’s an opportunity for boutiques to rise again, a turn that could be very good for the IPO market.

3. The implosion of hedge funds is good for IPOs. Hedge funds vary in size and style but until recently, the market movers who mattered were the fast-money behemoths. These players often care about IPOs only on day one. In a whiplash market, even longer term investors had little opportunity to amass measurable holdings of new issues. With the fast money players sidelined, patient “investment” (versus speculative) funds may again have time to develop confidence in management, a prerequisite for accumulating big positions in newly public stocks.

4. The new administration is good for IPOs: “It has not been the path for the faint-hearted, for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things…who have carried us up the long rugged path towards prosperity and freedom.”

Public recognition of the entrepreneurial spirit, and its critical role in our economy, by President Obama in his Inaugural Address. Enough said.

5. Constrained venture capital is good for IPOs. Comfortable start-ups, with logo-emblazoned, fleece-clad employees sometimes grow flabby. Conversely, start-ups scraping by to pay bills must focus on building and profitably selling products. While some genuinely need millions for development, others require only cheap computers and smart people willing to work like politicians during primary season. Eventually, outside investment fuels expansion, but examples from Apple (AAPL) to Intuit (INTU) to Google (GOOG) prove that, as the lottery once advertised, all it takes (at first) is a dollar (or a credit card) and a dream. Less venture money sloshing around today will likely mean fewer but stronger start-ups tomorrow.

It isn’t broken, please don’t “fix” it. Today’s IPO market is not healthy, but it is rational. Government’s role should be to insure that observant, active, on-the-ball regulators have the tools and backing to seek out and slam down financial cheats, thereby restoring confidence in the markets. If government can find a way to restrict extortionist lawsuits filed whenever a stock drops, that would help too. Otherwise, well-meaning administrators should stand clear.

When the markets settle and when the blue plate specials on blue chip securities abate, when the investment merits of an IPO are self-evident, a better and stronger market will be ready.

One of the differences between big companies and start-ups is that big companies tend to have developed procedures to protect themselves against mistakes. A start-up walks like a toddler, bashing into things and falling over all the time. A big company is more deliberate. The gradual accumulation of checks in an organization is a kind of learning, based on disasters that have happened to it or others like it. After giving a contract to a supplier who goes bankrupt and fails to deliver, for example, a company might require all suppliers to prove they’re solvent before submitting bids.

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These days, the more you talk to folks about Silicon Valley’s venture capital industry, the more negative the message is becoming. And for good reason. There’s no more patience. Last time, circa 2001, the entire VC industry got a “get-out-jail-free card” after the Internet bubble burst. That’s because the scores of new firms created in the late 1990s argued they should be forgiven for any poor performance–it was the bubble’s fault, and everyone was affected. Their investors–chief among them, the elite university endowments–agreed, and gave the VC firms more money to invest again. With most VC funds lasting for 10 years, this ensured the VCs a very long life indeed.

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Think long term. Long, long term. 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 percent 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.

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Silicon Valley was all a flurry late last week after reports that some respected venture capitalists woke up from their rosy daydreams to the fact that Wall Street’s meltdown is going to have a big impact on their future. Was it really necessary for these VCs to write memos, or as Sequoia Capital did, summon the CEOs of their portfolio companies to an emergency meeting at their Sand Hill Road lair? Some of the messages seemed to be no-brainers, such as “cash is king,” “lower your burn rate” and “if you are not cash-flow positive, get there now.”

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A shakeout in the venture capital industry appeared to take hold in the third quarter of the year, even before the latest decline in the stock market began. And we’ve also learned one more reason why Sequoia Capital may have reacted as quickly as it did with its terrifying R.I.P. message to companies: Sequoia raised more money than any other venture firm in the third quarter.

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The opening party of Boston-based Northbridge Venture Partners’ West Coast office in San Mateo, Calif., could not have come at a more awkward time. With the U.S. stock market sinking fast and rumors of venture capitalists being unable to access funds committed to them, I did not expect the shindig to be a happy affair.

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One afternoon last May in Menlo Park, Calif., a venture capitalist named Ray Lane led me from his office to the parking lot, where an automobile had been delivered a few hours earlier by flatbed truck. The car, built in Norway, was powered by batteries and had a plug-in outlet hidden under a flip-top cover near the driver-side door.

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All tech start-ups need just a few ingredients to germinate: sophisticated money, first-rate technology universities, and a few template successes (a Google or a Facebook, and so on) to encourage founders to get off their duffs. Contrary to current wisdom, these ingredients exist in many communities outside of Silicon Valley–in fact, they always have.

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