By BRAD STONE and CLAIRE CAIN MILLER

SAN FRANCISCO - Since the credit crisis began gripping the financial world, Silicon Valley has watched from the sidelines, secure in the faith that it was insulated from the coming storm.
That faith is now being seriously undermined. High-tech entrepreneurs, investors and executives now believe the question is when, not if, the financial chaos will hurt America’s cradle of innovation.
From San Francisco to San Jose, the effects are already palpable. During the week of September 28, Apple lost 16.3 percent of its value as investors reasonably concluded that consumers would shun expensive gadgets over the holidays in favor of lower-ticket items - or paying down their credit cards. Shares in Yahoo and eBay are at their lowest levels in years.
Other ominous signs abound. Semiconductor makers, many of which finance their capital-intensive operations with debt, have been hit hard.
According to a quarterly survey by Mark V. Cannice, director of the University of San Francisco Entrepreneurship Program, the confidence of venture capitalists has plummeted to the lowest level since the survey began in 2004.
“Everyone is worried about their budgets and everyone is worried about the economy,” said Jayant Kadambi, founder of Yume, a three-year-old online video advertising firm. “These are the conversations we have these days.”
The main drivers of Silicon Valley’s growth are start-up companies and the venture capitalists who back them. Many say that these engines of innovation are still moving along . Nevertheless, a pall of anxiety seems to be spreading.
“Funding will tighten up. We are certainly going to see some ripple effects,” said Ron Conway, a prominent venture capitalist who has invested in hundreds of Web start-ups over the last decade.
Start-ups that have less than six months of cash in the bank “better reduce costs,” Mr. Conway said. “I will certainly be advising my companies to do that.”
Silicon Valley has recited several calming mantras to itself during the prolonged economic turbulence. People are spending more and more time on the Internet - and advertising will inevitably follow. Blue-chip tech firms like Google, eBay and Cisco have balance sheets loaded with cash, not debt.
Yet nonstop economic gloom in other parts of the economy seems to have shaken the faith of even the most sublimely confident. Discussions of the economic crisis dominate conversations in the Valley. Technology blogs offer prescriptions for riding out the crisis and intense debates over what percentage of start-ups are destined to fail.
In the hardest-hit sectors of the overall economy, companies appear to be cutting their Internet spending. General Motors said in September that it was cutting its digital ad spending, after saying earlier this year that it would dedicate $1.5 billion, half its annual budget, to online advertising.
Jeff Lanctot, chief strategy officer at Avenue A Razorfish, an interactive advertising agency, said financial services and auto firms in particular were pulling back. He worries that if the economic woes continue, online advertising will be severely hurt in 2009. “The digital ad industry is clearly not immune from macroeconomic conditions,” he said.
One lingering problem in the Valley is a dearth of successful public offerings. Only six venture-backed technology and health care start-ups have gone public this year; only two are trading above their offering price. Last year, 86 such companies went public, according to the National Venture Capital Association.
That has plenty of people in the Valley worrying that venture capital - the fuel for new start-ups - might disappear as investors find themselves without a way to cash out.
Many Valley start-ups have still been reporting successful fund-raising. But an increasing number of those that have raised money say they feel as if they slipped through a rapidly closing door.
In early September, Skydeck, a 10-employee start-up that allows people to use the Web to organize their mobile phone calls and text messages, raised $3 million in venture capital. The very next weekend, the government took over Fannie Mae and Freddie Mac, and Lehman Brothers filed for bankruptcy protection.
“When I woke up on Monday morning I was pretty happy to have our fund-raising behind us,” said Jason Devitt, the company’s founder. “This week, I received a slew of e-mail congratulating us on raising money in this economy. Clearly there’s a real awareness of the impact.”
Jonathan Abrams, who founded the social networking pioneer Friendster, now runs a party-planning start-up called Socializr. Mr. Abrams is unimpressed with the Valley’s readiness in general, saying numerous uninspired, copycat entrepreneurs are obsessed with the internal gossip and minutiae of the industry.
“It seems to me like the industry is still in denial,” he said.