Is your engine heating up properly?
385 is low but once it warms up it should not be smoking
Indeed. It sounds like your car is not warming up properly. Is your T-stat stuck open or missing altogether? White/gray/bluish smoke on startup is normal, but it should clear up after about 1-3 minutes of running
If you have a Rabbit (older than 1984), and your IP is timed properly (i.e. at 1.00 mm of static timing), then the cold start lever will do absolutely nothing at all. You'll only really notice a difference if the timing is slightly (or greatly) retarded.
Did you set your static IP timing with the lever all the way in? If the lever is out, it affects the timing. From the symptoms you describe, it sounds like you did the IP adjustment properly.
Once the car warms up, that white smoke should dissappear. The fuel screw adjustment makes black smoke, as there is more unburned fuel. So, the fuel screw setting is likely fine.
I'd check the t-stat. As burn-your-money notes, 385 is a bit low for compression (near the wear limit), and starting may be a bit harder, but that should not create plumes of smoke that last longer than about 1-2 min. My old rabbit had about the same compression. While it was a bit hard to start in cold weather, it always started and did put out a puff of white/blue smoke.
There is one thing that catches my eye in your descripton: the fact that it won't start without preheat. By preheat, you mean plugging it in with a block heater, or preheating with the glow plugs? If you have to use a block heater, then there is definitely something wrong with your glow system. Check the fuse, check to see that the connections are clean and tight, and check for power at the glow plug buss. The glow plug dash light will come on, even if there is no power going to the buss/fuse/plugs. If by preheat, you mean 'glow the plugs', then that is normal.
Another cause of white smoke is buring oil. If your valve seals are bad, you'll see white smoke on start-up and when accelerating after a stop. If you have bad rings, you'll see white smoke at all times.
Either way, the compression is a bit low, but probably not the cause of the problem. The only internal problem I could forsee is bad oil-scraper rings or valve seals.
Let us know.