Source: Dow Jones VentureSource

VentureSource's Jessica Canning summarizes the past year for exits rather bluntly in a release today, noting that "2008 proved to be a very rough year for the U.S. venture capital industry." No kidding.

Only seven venture-backed companies completed IPOs in 2008 -- none of which came from Washington state. In fact, to put that number in perspective, Washington state alone saw 13 IPOs in 2000.  To make matters worse, seven IPOs was the lowest on record since VentureSource began tracking the industry in 1992. 

Mergers and acquisitions -- long the lifeline of VCs -- also took a beating. VentureSource reported that M&A activity fell by 54 percent over the previous year, with 325 venture-backed companies sold for $23.5 billion. The median amount paid for those companies was $45 million -- half of what it was in 2007.

Of course, all of this news presents a nightmare scenario for venture capitalists which rely on IPOs and M&As for returns. Without returns, VCs will have a much tougher time raising money when they attempt to hit the well in the next fundraising cycle.

Also working against venture firms are economic factors.

Many of the large pension funds and endowments that support venture capital firms have seen their public portfolios dwindle significantly in recent months. That means the venture capital portion of the portfolio now makes up a larger share than it once did. And that could be bad news for VCs who are hoping to raise another fund, since many of the large institutional investors have caps on how much they will put to work in the private equity markets.

In today's guest post on TechFlash, Faultline Ventures managing director Rod Coppedge spells out the problem.

"VC funds are watching their own sources of capital dry up," he writes. "A recent survey of institutional investors shows a significant percentage over-allocated to private equity. Capital calls are being canceled and managers are being told to hold off on asking for “re-ups” ... more reasons for VCs to make their current funds last."

Is this the perfect storm for the venture industry? Some are speculating that it is.

Obviously, things are going to get worse. But will venture capital as an industry survive?

I think so. In fact, the U.S. economy depends on having risk capital easily available to entrepreneurs. If that starts to dry up -- once again check out Coppedge's guest post -- things could get really ugly.