Until recently, Wall Street has justified its lack of interest in bringing venture-backed companies public by arguing that mutual fund managers and other potential IPO investors simply weren’t interested in buying stock issued by newer and riskier businesses that probably wouldn’t offer much secondary-market liquidity. Now, however, those same investors are scouring the public markets looking for companies that can offer growth at a time when the economy is in a slump. They aren’t finding it among many already-public businesses, says Kate Mitchell, managing director of Scale Venture Partners in Foster City, California. “The average company in the Nasdaq Technology saw its revenues fall about 20 percent in the first nine months of 2009,” Mitchell says. In contrast, revenues at Scale’s portfolio companies were up an average of 31 percent in the same period. “The small-cap-growth stock market right now is a private market instead of one that’s accessible to all investors,” Mitchell says.

A more likely reason for Wall Street’s lingering reluctance to return to underwriting venture-backed IPOs is that they are small deals that simply can’t match what they once earned from financing a string of buyouts and can still make from their sales and trading operations and even helping the growing ranks of vulture investors build portfolios of distressed bond assets. In comparison, a $7 million fee (split among members of an underwriting group) looks like chump change.

“We created a part of this problem for ourselves,” Kate Mitchell admits. “We allowed ourselves to come to rely too much on bankers that hadn’t grown up alongside our business model” in the way that the boutique firms known as the Four Horsemen (Alex Brown and Hambrecht & Quist among them) had done. “When bankers from Goldman and Morgan showed up, we let ourselves be wowed by the fact that the big guys were interested in us.” The Four Horsemen were swallowed up during the late 1990s by national commercial banks, which then, along with Goldman and Morgan Stanley, soured on venture-backed IPOs in the wake of the dotcom blowup. There was no one left to pick up the slack. “We ourselves weren’t being thoughtful about the long term when we didn’t support those investment banks that tried to become the next-generation Four Horsemen,” says Feuille, himself a former banker at Robertson Stephens, one of the Four Horsemen of yore. It was closed by parent FleetBoston, which is now part of Bank of America. “They didn’t get a share of the few deals that were the hottest, so they didn’t get a chance to thrive and turn into great new banks that would be there for us over the long haul.”

Mitchell agrees; she believes that, this time around, venture investors will make wiser choices when it comes to working with investment banks. That is, if they get the chance.

One reason Washington bailed out Wall Street was that they didn’t want to risk the possibility that the entire financial system would implode. But another rationale for the massive rescue effort was the fact that Wall Street’s financiers play a crucial role in financing American businesses, especially startup companies launched by American entrepreneurs. Legislators have been pushing commercial banks to resume lending. Maybe it’s now time to start leaning on investment bankers—whether it’s the familiar names like Goldman Sachs and Morgan Stanley or a new breed of boutiques catering explicitly to these companies—to live up to the other part of their role and fill the ever-widening financing gap.