A survey by California law firm Fenwick & West has revealed that quite like a large part of the economy suffering severe blows from the ongoing financial meltdown, even the venture capital and startups arena is beginning to experience the soreness.

Analyzing the terms of venture agreements for 128 companies of the San Francisco Bay Area, the survey specified the trends in venture capital investments in the 2008 fourth quarter. The survey found that though startup valuations are dropping and venture capitalists are driving tougher negotiations, the scene is still not as bad as it was during the dot-com bust, when valuations virtually nose-dived!

Out of the surveyed companies that received financing, nearly 33 percent either experienced ostensible down rounds, or an investment that put a lower valuation on the company, as compared to the former round of investment.

As the recession appears to be getting only worse at present, most financiers and lawyers predict a dismal situation of valuations plunging further - till the economy turns around for the better - and a lot more down rounds in 2009.

With indications that the number of startups to shut down will rise this year, and some venture firms may vanish, many venture capitalists consider it to be good in the sense that the weak players will be "cleared out", thereby enhancing the venture capital business.