The dot-com bust was bad for venture capital firms. This Great Recession has been another story altogether.

The severe downturn that has gripped the country for more than a year ravaged Southern California’s fragile venture capital industry, delaying fundraising and forcing even established local players to rethink strategies. At least one firm shuttered its L.A. office due to the challenges.

The dot-com bust earlier this decade, which decimated the tech industry, was thought to be the worst of times for the venture capital industry, but many found 2009 to be even worse.

“This is an economic cycle that we’ll tell our grandchildren about,” said Andy Wilson, managing partner of Momentum Venture Management, a Pasadena firm that invests in a broad array of companies.

After the financial crisis late last year, the equity markets locked up. With few public offerings of any type during the first half of 2009, the exit opportunities for venture investors disappeared and invested capital remained locked in startup companies, slowing the deal flow to a trickle.

Less than $400 million in venture capital was invested in L.A. startups through the first three quarters of 2009, according to data compiled by PricewaterhouseCoopers LLP and the National Venture Capital Association. That amount was down 64 percent from the same period in 2008, and represents the lowest total for any nine-month stretch in more than six years.

Thus, many local firms that remained active in 2009 either targeted smaller deals or made fewer investments.

Palomar Ventures in Santa Monica, for instance, normally makes about six investments in a year, but the firm did half that in 2009. Managing Director Jim Gauer said the falloff was a strategic response to the economy.

“We were not pushing to do deals rapidly in this environment,” he said. “It was a little bit of a falloff in quality deal flow and we had to set the bar a bit higher because it will be difficult for companies to succeed in a recessionary environment.”

Mark Suster, a partner at L.A.’s largest venture capital firm, GRP Partners in Century City, said his firm’s investments are about half the size they were a few years ago, a change he attributed in part to the reduced expectations for exits.

“The whole industry is doing smaller deals now,” he said.

Prism VentureWorks, a Needham, Mass.-based venture capital firm, even shuttered its Venice office this summer, saying it expects to shrink along with the industry.

“We believe our next fund will be smaller than our current one. If you’re going to have a smaller fund, it means you’re going to have a smaller team,” said general partner Jim Counihan.

Shortly after closing the local outpost, managing partner Gordie Nye, who opened the office by himself in 2005, left the firm.

The news, though, has not been all bad for the local venture community. Despite the difficult fundraising environment, GRP Partners closed a $200 million fund in March.

In April, DFJ Frontier, an offshoot of Draper Fisher Jurvetson, announced it was relocating its headquarters from Sacramento to a newly established office in Sherman Oaks. Co-founder David Cremin said that the move was precipitated by the rise in emerging media companies in Los Angeles. What’s more, DFJ announced the close of a $55 million fund.

Gauer said the exit markets, particularly mergers and acquisitions, are rapidly improving: “We’ve seen since about July or so a significant uptick in the buying patterns of the big acquirers.”

He said he hopes the change will help the industry regain its footing in 2010.

Still, many firms had their fundraising efforts stymied in 2009. Counihan said he expects a sharp drop in the size of most funds, “falling back to pre-1995” levels.

In this difficult fundraising environment, a number of firms have simply stopped trying until the economy recovers.

“Many people have elected to just postpone those efforts,” said Momentum Venture’s Wilson.

Since funds often take months or years to raise, such postponements could have long-lasting effects. With some funds running out of capital and few new ones to replace them, there is a growing concern that local financing activity may remain depressed for an extended period.

Suster, of GRP Partners, said there will be an increase in what he called “zombie VCs” – firms that have companies they have not cashed out of, but little or no capital to make new investments.

“These are funds that really aren’t investing right now but keep going and are hopeful they can raise another fund in a year or two,” he said. “But a lot of them will disappear a couple years from now.”