Venture capitalists got squeezed by the financial crisis in 2008. That squeeze is likely to continue in 2009.

Returns for these investors, who invest in start-ups with the aim of profiting when the companies go public or are sold, got crunched last year by a dearth of initial public offerings of stock and few mergers and acquisitions. The outlook isn't much brighter, as the recession is likely to continue to weigh on the IPO and M&A markets.

Meanwhile, the venture industry's investors, such as pension funds or university endowments, were hurt by gyrating markets, crimping sources of funding. Some venture-capital firms are having a tough time raising new money, which will affect the pace of new investments this year and may call into question the survival of some venture firms.

"The economic turmoil will engender a fair amount of Darwinian change," said Mark Heesen, president of the National Venture Capital Association, a trade group. He calls 2009 "a year of anticipation for the venture-capital industry."

That doesn't mean the industry will disappear. Because venture-capital funds typically are designed to last 10 years, many firms can survive for years without raising new money. Many venture firms that launched funds during the heyday of the late 1990s, when the dot-com boom was in full swing, are still hanging on.

Some venture capitalists said the industry also is more insulated from this financial downturn than it was earlier in the decade. Venture capital isn't as exposed to frozen credit markets as other industries because it typically doesn't rely on leverage. What is more, this downturn was rooted in bad credit and the housing market rather than venture capital's core sectors of technology and health care.

Still, there were some spillover effects. Dozens of venture-backed companies, including life-science chip maker Fluidigm Corp. and biotechnology company ChemoCentryx Inc., pulled their IPOs because of choppy markets.

In 2008, just seven venture-backed companies went public, producing $550 million in proceeds, according to research firm VentureSource, which is owned by News Corp., owner of The Wall Street Journal. That is down from 76 venture-backed IPOs that produced $6.8 billion in 2007.

In addition, the recession damped the M&A market for venture-backed companies. While 325 deals involving venture-backed companies generated $23.5 billion in 2008, that was down from 457 deals that produced $50.9 billion a year earlier, according to VentureSource.

"This downturn started in New York and London, and many of us didn't think the ripples would get this far," said Kate Mitchell, a managing director at venture-capital firm Scale Venture Partners in Foster City, Calif. She said her firm made only one new investment last year, compared with 10 to 12 typically.

To ensure existing companies have enough cash to weather the downturn, Ms. Mitchell said her firm increased reserves -- the money set aside to fund a start-up on a continuing basis -- in the first quarter and again in the third quarter.

In a survey of more than 400 venture capitalists released in December by the National Venture Capital Association, 72% of respondents said they don't expect the IPO market to reopen until 2010 or later. In addition, 87% of respondents said they forecast that the value of acquisitions will decline this year.

Many of the usual venture-capital investors are struggling with liquidity problems and sitting tight on cash. Some are reneging on commitments to venture-capital funds altogether. In November, Washington Mutual Inc. -- the Seattle bank seized by federal regulators and sold to J.P. Morgan Chase & Co. in September -- disclosed in a bankruptcy filing that it had defaulted on commitments to venture-capital funds run by Arch Venture Partners and FTV Capital, formerly called FTVentures.

The upshot is that venture capitalists are gun-shy about doing new deals and instead are working with companies in existing portfolios to cut capital expenditures and quickly become profitable.

"The bar is a lot higher" for making new investments now, said David Sze, a partner at venture-capital firm Greylock Partners in San Mateo, Calif. He said he has told start-ups they should assume they can't raise any money in 2009, which will push the companies to use cash more efficiently.

Some venture capitalists said the downturn has made it easier to do deals more cheaply than in the past. Patricia Nakache, a venture capitalist at Trinity Ventures in Menlo Park, Calif., said some start-ups that the firm passed on several months ago are now coming back with deals that will give the venture investors a bigger stake for the same amount of money. "We're hopeful we'll find opportunities to maintain our investment pace next year," she said.