The venture capital industry will continue to shrink, putting pressure on local start-ups hoping to raise money to grow their operations, investors said during a conference Thursday.

As more venture firms close amid the struggling economy, there is less money to invest. At the same time, existing firms are struggling to raise funds, which will stifle innovation among budding entrepreneurs.

Last year, there were 462 active venture firms that managed $177 billion. That's compared to 1,022 firms that managed $220 billion in 2000.

During a presentation at the Minnesota Venture & Finance Conference, Mark Heesen, president of the National Venture Capital Association, said the entrepreneurs getting money today have the strongest ideas and execute their plans.

"This is an industry that's shrinking," Heesen said. Corey Thompson, CEO of Naiku, a tech firm, said he's optimistic that start-ups like his can get money because, if it's the right company, investors will take a chance.

"There's a lot of cash out there. People just aren't doing anything with it right now," Thompson said. "At some point, it's going to break loose."

Venture firms are continuing to make large investments in start-ups, but they are struggling to raise future funds. Heesen predicts this could cause major problems in the coming years.

The issue is further exacerbated in Minnesota where the medical device and biotech industries receive 75 percent of venture capital investments. Nationally, these industries account for 30 percent of such funding.

Investors have been reluctant to fund medical device companies because it's uncertain how much money it'll take to bring their products to the market due to regulatory hurdles these companies must clear.

The firms must show venture companies that they'll be a good return on investment.

"Our investors have lots of alternatives," said Pete McNerney, partner of Thomas, McNerney and Partners, who attended the conference. "We're competing for dollars."

The venture conference, which drew 440 people, was organized by The Collaborative, a local group that links entrepreneurs with investors.

Wendy Lee • 612-673-1712