The US venture capital industry, which has become an important source of capital for technology start-ups around the world, is facing a severe shake-out that will lead to a contraction in future investments, according to some of Silicon Valley’s leading financiers.

These warnings follow one of the weakest years ever seen for profit-taking by start-up investors, and come amid predictions of an even worse period ahead. Only six companies that were backed by venture capital went public last year, the lowest numbers since the 1970s.

The other main way for start-up investors to realise gains – selling out to other companies – also hit a low point in 2008. Only 325 were sold, the lowest number since 2003, according to Dow Jones VentureSource. This lack of profitable “exits” for investors has come just as venture capital firms were hoping finally to recover from the dotcom hang-over – since many of the companies funded at the peak of the boom are now mature enough to be sold or floated publicly.

“There’s been far more money paid into our industry than being returned,” said Dixon Doll, founder of Doll Capital Management and current chairman of the National Venture Capital Association.

He blamed the “massive over-funding” that accompanied the dotcom boom and the generally weak state of initial public offerings since.

“There have been very dry periods before [for initial public offerings], but you have to go back a long way to see this,” said Michael Moritz, a partner at Sequoia Capital and an early investor in Google and Yahoo. “There will be a lot of departures, and there will be far fewer firms.”

The number of entrepreneurial companies moving to the public stock market had fallen sharply even before last year’s IPO drought. Fewer than 50 companies went public each year between 2001-2008, compared with about 180 a year between 1991-1998.

But the latest decline reflects structural changes in the financial industry that have made life harder for smaller companies, suggested Mr Doll. He said the technology IPO system had come to rely too much on a handful of big banks that no longer saw the business as profitable enough to be worthwhile.

“Everyone thinks they have to run to Goldman Sachs and Morgan Stanley to take them public, and we’re not at the top of their list of concerns right now.”