Optimism in the face of failure is big in Silicon Valley. Arguably more than anywhere else in the business world, its can-do entrepreneurs think of failure as the key to creativity.

But this week, finally, the US economic meltdown sent the chill wind of pessimism through the tech industry. Even the most hardened West Coast optimists were forced to look up from their latest Web 2.0 start-up project and take notice.

A blog post by influential entrepreneur Jason Calacanis set a new downbeat tone when he predicted that the collapsing US economy would kill between 50 per cent and 80 per cent of start-ups over the next 18 months. Then tech stocks, led by Apple, took a battering. They have failed to regain much ground.

The causes of the tech crunch are obvious - with consumer spending in the gutter, all those shiny gadgets are not going to fly off the shelves this holiday season. And with credit so much more expensive, businesses will cut back on IT costs as far as possible while trying to make their hardware last that bit longer. A fifth of all IT spending in the US comes from the devastated financial sector.

There is even talk of the rise of a grey market in hardware. Back in the last dot.com bust things got so bad that hardware sellers such as Sun Microsystems were affected by a rise in the second-hand market for servers and other assets sold off by bankrupt firms.

That has yet to happen but for a large part of the Valley tech sector - mature companies with as yet no revenue stream - things are going to get really difficult.

In happier times such established but undercapitalised firms would be looking for an IPO exit. That is simply not going to happen just now.

The IPO market in the US has been static for 18 months and the financial turmoil will keep it firmly closed.

What’s more, the acquisition market also appears to be closing. The big cash-rich beasts such as Google, Microsoft or in happier times Yahoo! have been important buyers of start-ups with good products and smart people.

But Microsoft has announced plans for a $40 billion buyback of shares. Many took this to mean that it simply could not find anything worth buying. That is scary news for the hundreds of Web 2.0 internet ventures whose “pre-revenue” existence is predicated on a cash buy-up after about five years.

For younger start-ups, there are also worries. In down market cycles, money for the seed and start-up stages is cut first. Companies with relatively untested or experimental technologies are going to find it much harder to persuade people they are essential.

Venture capital firms still have lots of money to invest but they are going to get picky. The mantra, repeated around the Valley this week, is that the crunch will weed out the weak while the best will go on to great things.

Bruce Golden, a partner with Accel Partners, a leading venture capital firm in the Valley and in Europe, said: “Start-ups are going to have to be even more compelling. They are going to be under intense scrutiny from venture capitalists and that is a good thing.”

He said the rate of deployment of capital may slow and companies would have to get lean and focus on getting profitable. The days of 100 per cent annual growth may be over for a while.

But venture capital firms are, mostly, not in it for the short term and most will look to ride out the current problems with their chosen partners.

“Silicon Valley takes the long term view. There are opportunities now for companies with disruptive technologies to come forward, take on the incumbents and create real value,” he added.

British software group Autonomy proved the point yesterday with predictions of buoyant third quarter results after another series of deals with big names such Xerox and Bayer.

The company has carved a market-leading niche by providing complex data search just as regulations in the United States require companies to provide much quicker “discovery” in case of law suits.

Chief Executive Mike Lynch told The Times that the company had a large backlog of orders and that while the macro economic climate looked weak, good growth was still possible in 2009.

“It is going to be very polarised. Strong software players whose systems are either core to business or driven by things like regulation will be fine but the weaker ones, the ones that get by in good times, may go to the wall,” he said.

The biggest buzzword in terms of growth is cloud computing. This week Steve Ballmer committed Microsoft to the concept of providing services on the internet, not on the desktop.

Businesses, especially small and medium-sized ones, are already being targeted by Software as a Service or SaaS firms offering access online to all their computing needs.

SaaS has the advantage of smaller upfront costs - no expensive licences or software packages - and scalability as businesses rent only as much as they need.

Even in these dark days, the Valley can find reasons to be cheerful.

Fred Wilson, of Union Square Ventures, an early stage venture capital fund in New York City, posted: “If you are working on a web technology company, be happy that you aren’t working for a bank, a brokerage firm, an automobile company, or in many other industries.

“The tools and services that are made in the web technology business are only going to increase in demand over the next five years.”

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