One of the most significant trends I’ve been watching over the past decade is the dramatic drop in public companies in Silicon Valley. Naturally, that number was artificially inflated during the dot-com bubble when it reached 417 in 2000. For our purposes, Silicon Valley includes San Mateo and Santa Clara counties, and the southern half of Alameda County.

But the number of public companies has dropped for nine straight years now. Even when IPOs briefly reappeared in 2006 and 2007, they weren’t enough to overcome the net loss of public companies through acquisitions or bankruptcy.

In 2008, the number had fallen to 261. We just updated our records and the latest figure is 241.

That’s not just less than the dot-com era, that’s well below the 315 public companies the valley had in 1994 when the Mercury News started keeping track.

Here’s why I think this is a big deal.

First, it points to the massive consolidation at the top of the pile. The biggest companies continue to get bigger, in large part through acquisitions. This includes Hewlett-Packard, Oracle, Cisco Systems and now Google. We’re known for our start-ups, but increasingly the valley landscape is becoming dominated by these big enchiladas. That’s bound to have an impact on the rate of innovation.

Next, the IPO remains a lost dream. Yes, it briefly reappeared last decade, but even in the good times last decade, they were nowhere near the pace of the early and mid 1990s. The IPO is dead, and it’s time to let go and rethink the way innovation gets funded and rewarded.

Increasingly, venture capitalists have to look to acquisitions as the best hope for an exit. And these simply don’t produce the returns that an IPO homerun does. That means a big shakeout in the VC community is inevitable. Though it will unfold over many years, in a kind of slow motion implosion.

Each year, we publish our SV150 section that looks at the top 150 public companies in the valley. At the pace we’re going, by the end of this decade, we won’t even have that many public companies.

The valley has always managed to adapt to such fundamental changes. But I think the continued disappearance of public companies will pose one of the valley’s greatest challenges. If the valley remains on top in 10 years, it will be because the innovation economy looks far different than it does today.