Venture capital investing took a turn for the worse in 2008, both nationally and locally. It's hardly a surprise given that most venture capitalists and entrepreneurs retreated into bunker mode for the final three months of the year.

But Washington state's venture industry took a bigger hit than the other major regions, which could spell trouble for the innovation economy here.  VCs invested $906 million in 93 deals last year in the state, a 35 percent drop over 2007 levels, according to data released today by Dow Jones Venture Source.

That made it the worst performing major region in the country. By comparison, venture investments dropped by 19 percent in New England; 18 percent in Southern California and 11 percent in Texas. Annual investment levels actually increased four percent in the San Francisco Bay Area, the leading region with $11.2 billion invested in 848 deals. (Correction: The the dollar amount and number of deals for the Bay Area has been corrected.)

Why such a dramatic decline in Washington state?

There were some massive venture rounds in 2007, including bets of more than $100 million in Imperium Renewables and Telecom Transport Management which boosted the numbers. But big deals are part of the business and have always propped up the numbers, as we saw with Big Fish Games whopping $83 million round in September 2008. So that's only part of the story.

The freeze in Seattle's venture community has had a serious impact on the financing efforts of many startup companies, with a number of venture-backed companies cutting staff in recent months in order to preserve cash. Others are simply foregoing financing efforts. New deals, according to the TechFlash list, are still occurring in select cases, but not with the frequency of 12 months ago.

Historically, Washington also has not been as strong as states such as California in the clean tech/energy sector, one bright spot in the latest venture numbers.

What's more disconcerting is that the investment totals in 2008 dropped below $1 billion in the state for the first time since 2005. That places Washington just behind the Potomac region and Texas.

Nationally, venture capital investments declined eight percent to $28.8 billion. The fourth quarter was especially rough, with a 30 percent drop to $5.5 billion.

“The data confirms what we’ve being hearing anecdotally for some time that many venture capital firms are circling the wagons to weather the downturn and are focusing more on the health and vitality of current portfolio companies rather than new investments,” said Jessica Canning of Dow Jones VentureSource in a statement. “And while traditional areas of investment like IT and health care, which are well stocked with venture-backed companies, are seeing predictable pull-backs, VCs are still eager to put capital to work in burgeoning areas like energy and consumer goods, which saw record investment in 2008.”

Other highlights from VentureSource:

--Fourth quarter investments in Information Technology -- including software companies -- dropped to $2.2 billion, the lowest level since 1998.

-- U.S. health care investments dropped to $1.5 billion in the fourth quarter, down 42 percent from the $2.6 billion invested in the same period of 2007.

-- Investments in energy (which includes many clean tech companies) was a bright spot, with a record $3.6 billion invested in 2008. That was more than double the previous year.

--The median venture round size for 2008 was $7 million, down from the record $7.4 million in 2007.