New York's Silicon Alley may be just a few blocks from the Great White Way, but much of the drama in the technology world these days is unfolding on the other side of the map on Sand Hill Road. That's where top Silicon Valley venture firm Sequoia Capital opened an October summit for its portfolio companies with the image of a tombstone that read, "R.I.P. Good Times." The message was clear: The financial fury shaking up the U.S. economy was preparing to let loose on tech startups, resulting in sharply lower consumer and enterprise spending, anemic deal markets and falling venture capital investment.

To some members of the East Coast venture capital and technology community who had been living with the financial crisis at least since the government bailout of Bear Stearns Cos. in early 2008, the hubbub seemed over the top. Calm down, advised Alan Patricof, patriarch of New York's VC community from his perch at Greycroft Partners LLC, which he launched in 2006, and a longtime investor as founder of private equity firm Apax Partners Worldwide LLP nearly 40 years ago.

"This is not a time to panic, cut off all investment in the future and burrow into a dark hole," Patricof wrote in a memo in response to Sequoia's widely publicized circling of theVC wagons.

Perhaps the most obvious reason for the difference in tone is the location of the problem. Ground zero for the dot-com crunch in 2000 was Silicon Valley; this time around, it's Wall Street. And if West Coast VCs seem suddenly, if perhaps belatedly, awake to the magnitude of the economic crisis, their colleagues in the East have been inspecting the rot in the subprime mortgage and credit markets for months.

"A downturn has been evident for a while here in New York," says John Borthwick in a memo addressed to the companies backed by Betaworks, a technology incubator he co-founded a year ago that has invested in nearly 20 seed-stage Web 2.0 firms, most headquartered in New York, including name startups such as Iminlikewithyou, Outside.in and Tumblr Inc. Indeed, Borthwick first addressed the impact of the crisis with the New York firm's portfolio entrepreneurs in March at one of Betaworks' regular brown-bag lunches.

Such frugality typifies the relatively modest scale of many venture-backed endeavors in the Big Apple, where the best-known hangout for entrepreneurs and their investors is Shake Shack, an outdoor burger stand in Madison Square Park in Manhattan's Flatiron District. (One reason it's a hit with techies is that you can monitor the length of the line via Webcam and "microblog" Twitter.) More broadly, the city's VCs insist that local entrepreneurs, having learned the lessons of the dot-com era and the "nuclear winter" that followed, are ready for a prolonged economic decline.

"Most companies back then had million-dollar-a-month burn rates," recalls Fred Wilson, who co-founded venture firm Flatiron Partners during the Internet boom and who is now co-founder of Union Square Ventures, a prominent early-stage investor in New York startups, including Clickable Inc., Covestor Inc., Etsy Inc., Meetup Inc., Tumblr and 10gen Inc., as well as other notable startups such as Twitter.

"Today, Union Square's portfolio companies are spending $50,000 to $70,000 a month, or $600,000 to $700,000 for the whole year," Wilson says. "In this environment, that's a much healthier place to be."

A decade ago, a startup was expected to require outside funding of at least $5 million to generate revenue within two years. Today, thanks to cheap online data storage tools, open-source programming and low-cost overseas labor, startups specializing in, say, user-generated content can get off the ground for no more than $500,000, with investors expecting to see revenue in six months.

The trend toward ever-larger venture funds has been under way for years in Silicon Valley, driving many blue-chip VC firms in the region to focus on later-stage investing, which emphasizes larger injections of capital in more mature companies. By contrast, East Coast VC firms, both by necessity and because of the emergence of promising online media, software and advertising startups in the area, have zeroed in on younger, and riskier, companies.

Philadelphia's First Round Capital, co-founded by Josh Kopelman and Howard Morgan in 2004, was one of the first seed-capital, or "micro VC" firms, typically making investments of $400,000 to $800,000. By comparison, most Silicon Valley firms invest in increments of $3 million to $5 million in the early stages, with follow-on investments of $10 million to $15 million.

There are exceptions to this regional divide, of course, including Jeff Clavier's SoftTech VC and Mike Maples Jr.'s Maples Investments LP, two of the West Coast's most notable early-stage investors. Meanwhile, not all the newer Eastern firms make investments quite as small as First Round's. Greycroft, for example, invests in early-, but not necessarily seed-stage, companies with investments of $500,000 to $3 million.

Another general difference in the investment cultures clustered around San Francisco and New York centers on the kinds of startups seeking capital. Silicon Valley VC firms often back tech companies coming out of universities that require capital-intensive investments in areas such as semiconductors, medical devices and cleantech, while Silicon Alley VCs are more likely to invest in startups that capitalize on Manhattan's media, entertainment, advertising and financial services industries and don't need massive amounts of funding to get a product out the door.

Even in social networking, a sector that in its popularity cuts across regional lines, West Coast deals have tended to be bigger. For instance, Palo Alto, Calif.'s Facebook Inc., the most significant social networking firm today, has raised more than $38 million from Bay Area firms Accel Partners, Greylock Partners, Meritech Capital Partners and the Founders Fund and an additional $240 million from Microsoft Corp., which, until the air started leaking out of the Web 2.0 bubble, famously valued the company at $15 billion. Tumblr, on the other hand, has raised $775,000 from East Coast firms Betaworks, Union Square Ventures and Spark Capital Partners LLC of Boston and is valued at $3 million.

That's unlikely to change anytime soon. New York entrepreneurs, who with their lower levels of funding have had to run lean operations, are intent on staying "small and scrappy," says Jason Goldberg, founder of Socialmedian, a service that lets people share news stories across social networks.

In January, Goldberg moved from Seattle to New York after stepping down as CEO of Jobster Inc., an online career startup he founded that raised more than $50 million from heavyweight VC investors Ignition Partners, Mayfield Fund, Reed Elsevier Ventures and Trinity Ventures. At Socialmedian, which is backed by less than $1 million in angel funding, Goldberg works out of his home and hires developers in Pune, India, which keeps his overhead as low as possible.

Yet many New York investors were chanting the mantra of capital efficiency for pre-revenue startups even before the financial crash undercut venture capital funding. "Do more with less. Do MORE with less," urged Borthwick in his memo.

That admonition may soon become gospel, irrespective of geography, as venture funding slows. VCs invested $7.3 billion in the third quarter, down 7% from the year-ago period, according to Dow Jones VentureSource. The investments also were distributed among 20% fewer companies than in the previous year, while the bulk of investments were in second- and later-stage rounds.

In many sectors, such numbers are bad news for anyone seeking funding for a new enterprise, especially first-time entrepreneurs without a proven track record.

"The next 12 months may be a period of the 'haves and have nots,' " Wilson wrote in a recent blog post. "In tough times, the money will keep flowing to the best companies and will stop flowing to the worst."

Along with advising startups to conserve cash, New York VC firms are topping up portfolio companies with fresh funding, projecting that the economy may take years to recover.

"We always have reserves built in, but I think it's fair to say we're looking at them and increasing them on a case-by-case basis," says Jim Robinson, who co-founded RRE Ventures LLC with Harvard Business School classmate Stuart Ellman in 1994.

RRE has raised more than $1 billion since and invests in many New York companies, including Drop.io Inc., RecycleBank Inc., SkyGrid Inc. and Storm Exchange Inc., as well as in Betaworks.

Still, while RRE is carefully monitoring its portfolio companies for signs of trouble, the venture firm continues to make investments. It recently led a $4.5 million Series B round in AdaptiveBlue Inc., a New York "semantic Web" company also backed by Union Square.

For Robinson, navigating the skittish markets must be balanced against preparing for the inevitable, if unpredictable, uptick. "For several weeks, we have asked the question whether we are doing enough to make sure our companies are both fiscally prudent in extending their runways while not sacrificing opportunities," he says.

The biggest problem for startups and investors nationwide is the lack of viable exits. In the third quarter, only one venture-backed tech company went public. Mergers and acquisitions are also decreasing, with VC exits in the latest period falling to their lowest level in five years, according to Dow Jones VentureSource. More bad news came from Google Inc. of Mountain View, Calif., in October, when CEO Eric Schmidt announced that the search giant will make fewer acquisitions, dashing the hopes of many a startup entrepreneur.

"RRE has a number of companies that had zero revenues when we invested and which are now doing $100 million or more in revenues and growing very quickly," blogged RRE's Ellman recently. "These companies have achieved what they needed to achieve, become market leaders, yet they cannot go public or exit under the assumptions that employees or founders assumed when they began."

Many New York VCs say they already factor in such realities into their investment strategies.

"Our charter works well in a good environment but really protects downside risk in this type of environment," says Lewis Gersh, a managing partner with Metamorphic Ventures LLC, a boutique VC firm in New York previously known as Gersh Venture Partners. "We find startups that are capital-efficient at reasonable valuations and that don't require an enormous amount of institutional capital to stay alive."

Metamorphic has a narrow filter, investing in mobile, digital media and transaction-processing startups that meet specific criteria. These include expectations of generating revenue within six months and reaching profitabililty in two years. It also means doing that on funding of no more than $2 million, which the firm says results in lower, more realistic valuations and, as such, a range of exit opportunities.

"We may not invest in a hot social media deal that has no revenue model or path to profitability," says David Hirsch, a managing partner at Metamorphic. "But exits are sexy."

To that end, Metamorphic has already had a few deals, including digital media firm IndustryBrains Inc., sold to Marchex Inc. in 2005 for $34 million and transaction processing company Tranvia Inc., acquired by Ceridian Corp., also in 2005, for an undisclosed amount.

Although Silicon Valley may have been slower to recognize the impact of Wall Street's woes on its investors and entrepreneurs, West Coast players are reacting in other ways more swiftly than their Eastern brethren. A growing number of California tech companies have recently laid off employees in an attempt to align costs with slowing growth. How deep these cuts will ultimately have to go, how profoundly they will reshape the tech finance landscape, remains an open question.