Aug. 14--For two shining moments last week, Benchmark Capital reminded Silicon Valley of the win-win way venture capital is supposed to work.

First came news that Facebook, the social networking giant, was buying startup FriendFeed for $50 million. Then VMware, the computer "virtualization" pioneer, snapped up SpringSource for $420 million. Kudos were lavished on Peter Fenton, the Benchmark partner involved in funding both FriendFeed and SpringSource, for deals that produced timely, lucrative returns for Benchmark and its investors, as well as for the startups' founders and stock-owning employees.

"Venture capital is a home-run business," said Astrid Noltemy, managing director of the financial research firm Cambridge Associates.

But most VCs are swinging and missing these days, suffering a profound slump that dates to early 2008. Splashy Wall Street initial public offerings of stock, as well as merger and acquisition deals, have been few and far between since late 2007.

Glimmers of hope are found in a mild rebound of IPO registrations with the Securities and Exchange Commission, which dropped to zero in the first quarter of 2009. Fortinet, a Sunnyvale computer security firm, recently joined a flurry of registrations. But many companies that signal intentions by registering for an IPO haven't follow through with the Wall Street debut.

"We are seeing more positive signs than at the beginning of the year," said Mark Heesen, president and

CEO of the National Venture Capital Association. The group has tried to rally its membership around a series of private-sector and public policy initiatives that it says will revive the IPO market.

But more than a year after the NVCA first warned of a "crisis in capital markets," Silicon Valley's startup economy seems to be crawling through a financial desert. VCs are having a much harder time raising money, and scrimp as they make investments. Entrepreneurs may be feeling dizzy with the topsy-turvy economy in which so-called "down rounds" of venture funding are up and "up rounds" are down (as will be explained later.)

"I think its going to roughly stay the way it is now until we see the IPOs and M&A exits reopening, because that drives the VC business," said attorney Michael Patrick, a partner at Fenwick & West and co-author of recent survey of startup funding. A recovery, some observers say, may not occur until well into 2010 or later.

"Because of the shortage of exit opportunities, venture fund managers will need either to own companies longer or potentially sell at reduced values," Cambridge's Noltemy explained.