While the US recession wasn't declared official until the end of November, the Valley's been in lockdown mode for a while now.

We knew things were bad in October when blue-chip VC firm Sequoia Capital called an emergency "all-hands" meeting for its entire portfolio of start-ups. The gathering was supposed to be secret, but was blogged about within hours.

Sequoia's message to the assembled entrepreneurs was sobering: we're heading into a protracted downturn that will take serious economic discipline to survive. The event kicked off with a PowerPoint slide of a gravestone engraved with the motto: "RIP: Good Times."

The Valley's big guns have been feeling the pinch, too, with lay-offs at Applied Materials, National Semiconductor, HP, Cisco, Sony, Nortel, Symantec, and just about everyone else. But while no one here's getting rich quick any more and a bunch of former tech employees won't be so merry this Christmas, there's another mood - cautious optimism.

Amid all the pain, there's a sense that we're getting back to how things should be; smaller deals between people who know what they're doing. My neighbour, Paul, runs a stealth wireless start-up out of his house. He's not thrilled about the economic climate, but he was living on a shoestring anyway, so he's not that worried. Plus, he tells me, "there's a lot of talent on the street right now".

"When the economy is in turmoil, the time is ripe for innovation," advises this month's Wired magazine. There are plenty of people here echoing the sentiment.

Prolific blogger and start-up guru Dave McClure is excited. "Downturn? my ass," he said in a Twitter post. "I'm seeing more interesting start-ups than EVER these days. it's a great time to be an entrepreneur AND investor."