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Optimism springs eternal at Web start-ups, VCs

Whistling past the graveyard? Maybe not. There's more happening in start-up land than just a shedding of personnel.

VC money

There's more happening in start-up land than just a shedding of personnel. In talking with entrepreneurs and venture capitalists, I'm picking up on the beginning of a shift in attitude: a move away from the panic reaction that had set in last week, and toward more thoughtful plans.

The shakeup in big public companies is actually driving people toward start-ups, according to Rob Hayes of First Round Capital. "You've got an environment where big companies are in flux," he said. "Yahoo is having layoffs. Google options are under water. Even the good people there are saying, I'm not going to be able to get things done for the next 6 to 12 months. People who want to get something done are going to want to shift out of the large companies to small ones. If you're going to suffer the death of a thousand cuts, why not go somewhere where you can shape your destiny?"

"You are going to see a lot of interesting companies get started," Hayes says.

It's an open question as to whether these companies will be able to get funding. "The venture economy is not going to get worse than the economy at large," Hayes says. Unfortunately, that still leaves a lot of room for pain. VC funding is already reeling (see VC confidence level takes third-quarter hit) and the next quarter's results are likely to be much worse.

Even so, Hayes is looking to see where there are good people "loose in the socket" at current jobs that he can encourage to move to start-ups. "There are plenty of companies that have plenty of capital and are going to grow and take market share," he says.

The people most likely to be able to take advantage of the new reality, which carries both potentially high reward as well as high risk, he says, "are the stars and the people who can afford to be broke for a couple of months." Middling performers, he says, "don't work in this economy. But that hasn't ever been what built the valley."

Entrepreneurs continue to adjust in their own ways. Even companies that are not laying off staff are changing their hiring. Lorenz Sell, CEO of Blue Lava Technologies (which makes software for organizing digital photos called iLovePhotos), told me he has "reduced hiring projections," and has closed down some open job reqs without filling them. This is in part due to caution about the economy, he says, and in part because he's raising money for his company and doesn't want to appear profligate in front of a group of what he perceives to be increasingly skittish venture capitalists. "Your board doesn't want to see you hiring; your investors don't want to see you hiring," he says. It doesn't really matter what the market realities are. "VCs are flipping out about being efficient."

But Sell still believes it's a good time to be aggressive. The downturn, he says, "makes us smarter about where we go," but, "It's a good time to be aggressive." There's good talent available, and with marketing budgets getting cut there's, "less noise, so you can be heard more."

Still, his advice for the jobless or for those looking for a new job is sobering. He advises people to follow the advice VCs are giving to their companies: "Minimize your burn, get ready to ride out the storm."

Seesmic's Loic Le Meur, who laid off seven people last week, adding to the three he had let go in September, told me that the tough times are forcing him to focus. "We try a lot of different things," he says. When start-up experiments don't work, unfortunately, people can lose jobs. Le Meur says the downturn will enforce a discipline on the company as it drives towards revenues over users. Future hires will be funded from revenues, he says, not fund-raising activities.

"I have three years now to make it work," Le Meur says, referring to the cash he has in the bank. "Nobody should go into panic mode with three years of funding."