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Three years ago Venture Capitalist Timothy Draper graced the cover of a financial-industry trade magazine wearing a wide grin and a Captain America costume. Draper, the tagline said, had joined the “League of Extraordinary VCs” for his smart investments in Chinese search service Baidu and free PC phone service Skype. Both picks earned Draper’s firm, Draper Fisher Jurvetson, and one of its affiliates millions in profits.

Baidu and Skype are today highlighted prominently in DFJ’s press materials, and since late 2000 the firm and its affiliates have raised an estimated $3 billion for traditional high-tech investments as well as forays into new markets like Brazil and India. All that money has enriched DFJ’s partners: In the last ten years they’ve likely earned tens of millions in annual fees.

Lots of DFJ’s investors, though, are still waiting for their payoff. Many of the big universities, foundations and rich individuals who parked money in the firm’s flagship funds have yet to see a dime of profit from Baidu or Skype. Those homerun investments were made from a DFJ affiliate called Eplanet Ventures, in which only some of DFJ’s investors participated. (DFJ declines to say how many.)

The investors in other big DFJ funds raised around the same time as Eplanet have come up empty. The return on the DFJ’s $640 million Fund VII, raised in 2000, is a sickly –2% as of Sept. 30, according to quarterly statements sent out to the fund’s investors. So far it has paid back only $115 million to its investors, even though the fund is entering the ninth year of its ten-year life and should be realizing more gains. Many investments have been marked down significantly. Investors would have been better off buying the S&P 500 index, which is down 0.4% annually in the same period.

The venture capital industry is staring at the most vicious shakeout in its history. Returns are pathetic for most funds, the public offering pipeline on which venture depends for its exit strategy is clamped shut, and with the shares of many big publicly traded tech companies swooning, those firms are less likely to buy up promising upstarts.

Tim Draper can find plenty of sympathy on Sand Hill Road, that rarefied stretch of pavement in Menlo Park, Calif. that is home to the world’s premier VC firms. The median annual return for all venture funds raised in 2000, the peak of the dot-com craziness, is –1%, according to research firm Cambridge Associates. By that measure DFJ doesn’t look so bad.

Where Draper won’t find much sympathy is with the pension funds, foundations and well-heeled investors who make up the base of venture firms’ investors. These so-called limited partners have always looked to venture as a way to sweeten conservative portfolios with some concentrated bets in high-flying software and biotech upstarts. The venture firms earn between 2% and 2.5% of their capital under management and retain 20% to 30% of any profits. In exchange for their fees, VCs were counted on like heroes to spot and nurture the next Ebay, Google, Genentech and Cisco, firms that have made the U.S. the world’s incubator for innovation.

A ray of hope in the hard-knocks economy: Despite few foreseeable exits, early stage investors are still making bets in a handful of promising, high-growth sectors.

In fact, venture capitalists have put only slightly fewer dollars at stake as they did this same time last year, before the financial crisis had gained any traction. In the three quarters ended Sept. 30, venture-capital investment was down just 4%, to $22.3 billion, versus the same period in 2007, according to VentureOne, an industry tracker.
Compare that to the relatively comatose market for initial public offerings, which tends to offer the juiciest exits for VC funds. Measured in dollar terms, the 50 IPOs in the first three quarters raised just $30.5 billion, compared with the 261 deals that yielded $60.5 billion in the first three quarters of last year. Only eight companies went public in the last three months, raising a mere $1 billion.

Nandan Nilekani is cochairman of Infosys Technologies (nasdaq: INFY - news - people ), India's second-biggest outsourcing firm. Its success is the basis of his $750 million fortune. We caught up with Nilekani at the Infosys headquarters in Bangalore, where he talked about the company he helped build, the outsourcing industry and his first book, Imagining India: Ideas for the New Century (Penguin), just released.

FORBES ASIA: Will economic conditions change things for Indian outsourcing?

Nilekani: There will be deep ramifications. In the short term outsourcing will slow down. Companies will go slow on making decisions, the environment will be challenging. This is a big one, but even this cannot last forever. The U.S. has an enormous capacity for reinventing itself. That is clear from the fact that Barack Obama has been elected President.

As part of his campaign, Obama spoke against offshoring. Will this affect policy in the coming months?

Barack Obama will do things that are right for his country. He understands that outsourcing firms are partners in making American companies stronger, more efficient and successful.

India's outsourcing industry grew from a few billion dollars to $40 billion in the last few years. What do you see happen in the next five?

It is unlikely that we will see the growth rates of previous years. Not 30% to 40%.

After years of high growth, outsourcing companies have started layoffs. How will workers cope?

Many young people who joined the industry four or five years ago have only seen the good times. It was growth on steroids. They could have been lulled into a feeling that this is normalcy. We have to do a lot of things that are hard. The economic crisis is useful because it forces all of us to focus on productivity.

Infosys spends a huge amount of money and resources on training fresh hires. Is this a sustainable business model during these recessionary times?

We set up our leadership institute in 2001 and our training infrastructure in 2002 during a downturn. We think of our training as a long-term strategic advantage.

Talking about reinvention, have you reinvented yourself?

I used to take on a lot of things, thrash around, lose control and have nothing to report at the end of the day. My new motto is to be generous with my money but stingy with my time. My scarce capital is time, not money. I'm turning down meetings, invitations to speak. I have dropped all commitments on foreign company boards. I have decided that the place I want to spend time is India. Not to sound arrogant, but I use my name to improve my productivity. If I am going to the airport, then I will travel to three cities, ask people to make time for me, pack 15 meetings into three days and come back. Infosys has first call on my time.

Your idea on the flat world ended up inspiring a bestselling book authored by Thomas Friedman. What is the bestselling idea in your own book?

It is not one idea. A democratic country like India with a billion individualistic people cannot move in a particular direction based on one idea. It calls for a bottom-up change.

Does middle-class India live inside a bubble, having very little to do with the rest of India, which is very poor?

India's middle class has abdicated. In its extreme form, many Indians have left the country. But abdication is also living in gated communities, running our own generators, digging bore wells for our homes, sending our children to private schools--in my own case, sending them to college in the U.S. The middle class has never put pressure on the system. They have simply dropped out.

Does writing come easy to you?

I used my experience in writing software to write the book. When you write a software program that is large and complicated, just as this book is, then you structure it well, divide it into individual modules, write each module to be self-contained and make sure there are clear interfaces. I wrote a book that spanned 18 ideas. I sliced these into sections and put a wrapper around each.

(Nandan Nilekani was FORBES ASIA's Businessman of the Year for 2006. See "Businessmen of the Year" for this year's winner.)