As the technology industry grapples with an unprecedented financial crisis and a virtually extinct initial public offering market, it is no secret that emerging-technology companies are facing an extremely difficult business environment.

Emerging companies are utilizing capital more cautiously and seeking to raise additional funds in the short term, while investors stand to benefit by increasingly demanding more favorable deal terms, according to respondents of law firm Foley & Lardner LLP's annual emerging companies survey, released in December.

For the past four years, Foley has surveyed the attitudes and perspectives of top executives, investors, advisers and outside consultants in the emerging-technology industry. The optimism of previous surveys has given way to the most challenging economic environment in survey history.

Foley's new survey found that the highest number of respondents ever (61%) said that it is more difficult to start a company today compared with a decade ago. Only 38% agreed with this statement in 2007.

In response to this environment, emerging-company executives are extending their time frame for an exit. Of responding executives, 81% told us they are three or more years away from an exit, and only 1% expect to exit within the next year. This represents a steady increase from the already high percentage of respondents that indicated this extended time frame in 2007 (72%).

Access to capital is a chief concern among emerging-company executives. A large number of all respondents (71%) expect access to capital to remain flat or decline over the next 24 months. Also large were the 74% who agreed that companies today need to be prepared to survive on less capital than they did a decade ago. Since we started collecting our data, the number of respondents who expect access to capital to grow has declined from 73% to a mere 30% in only four years.

As a consequence, emerging companies continue to apply capital at a more conservative rate. Moreover, they're hedging their bets by seeking additional investments. Of emerging-company executives, 61% indicated that they sought capital within the past year, and 65% plan to do so again within the next 12 months.

Investors are clearly taking advantage of the adverse economic environment. Seeking more favorable deal terms in light of current economic conditions were 62%, and 33% are initiating a change in value of their portfolio companies. Among the terms, 88% of investors are instituting an increase in the use of operational or strategic milestones designed to influence valuations, and 67% are phasing their investments in over time rather than making them all at once.

Early-stage companies should expect to face significant challenges in 2009, as 76% of all respondents said they are seeing venture capital firms focus on larger deals, making $5 million to $10 million deals scarce.

Additionally, 24% of investors said they are moving from early- to later-stage companies as they refocus their investment strategies in response to economic conditions.

Investors and executives responding to the survey are not aligned with regard to the industries best positioned for success over the next two years. Investors identified software/IT (59%), medical devices (50%) and biotech (41%) as the sectors poised for success in 2009 and 2010.

By contrast, emerging-company executives identified alternative energy (60%) as the top industry poised for success compared with only 36% of investors. Executives were also less bullish on software/IT (38%), medical devices (20%) and biotech (29%).

However, both executives and investors agreed that retail, manufacturing and telecommunications represent the industries with the worst outlook over the next 24 months.

A mere 3% of responding emerging-company executives said they are planning an IPO as their exit strategy. In addition, investors, executives and advisers were nearly unanimous (99%) in their view of the IPO market as either "stagnant" or "declining" over the next two years.

In response to the findings of the 2007 survey that showed neither investors nor executives were panicked about market conditions, we wondered whether this downward trend would become more pronounced in the next year's survey.

The 2008 survey clearly demonstrates the unprecedented challenges that faced tech startups in 2008 and indicates that they will continue to face difficult times in 2009.

Gabor Garai is chair of Foley & Lardner's private equity & venture capital practice and Susan E. Pravda is chair of the firm's emerging technologies industry team.