EUROPE- European venture capital activity has shown further declines in the second quarter, according to a survey by Ernst & Young and VentureOne. The gloomy results confirm the gradual waning of Europe’s venture capital industry since 2000 but venture capital companies argue that the figures should not be taken out of context.

The survey shows a sharp fall in the number of deals across Europe since 2000, from 3172 deals that year, 2052 in 2001 and an unpromising 530 deals for the first half of 2002. Amounts invested have also dropped. At e2.4bn for the first half of this year, the amount of money raised is down 46% from the second half of last year.

Germany has experienced the largest drop in activity so far this year . E220m was invested in Germany the first half of this year representing a 76% decline from the previous half. Deal flows also fell 93% with only 81 being executed.

The UK, French and Swedish markets also saw large drops in activity while Danish venture-backed companies actually rose 35% during the first half of the year.

Steve Harmston, director of European research at VentureOne explains: “Investor focus in Europe has continued to shift toward more mature companies, much as it has in the US. At the peak in the first half of 2000, seed- and first-round companies received 58% of all venture investment. That allocation has now shrunk to 25%.”

Venture capital companies, however, argue that figures pre-dating 2000 should be included for a more accurate view of the market. The amount of funds raised post-2000 are indeed negative in comparison to those between 1997 and 2000, but are in line with the period 1989-1996.

“It is unreasonable to compare today’s figures to those produced during the bubble of 1997-2000. The market has since returned to normal, as following most peaks, and the current figures are in line with those prior to the bubble,” says Neil Crabb, joint managing director at Sigma Technology, a UK venture capital company.

Calculations produced by the European Investment Bank last year show funds raised and investments prior to 1997 to be stable - between e3bn and e5bn each year. During the telecoms bubble of 1997-2000 funds raised shot up to e20bn to e25bn. The e2.4bn of investments of the first half of this year therefore seems more in line with the historic trend.

Crabb remains confident that the venture capital sector will steadily grow in the long term. “More institutions are looking at the area, as it is one that produces consistent favourable returns. If the UK government reacts to suggestions made in the Myners report of last year, that pension funds should be able to invest in alternatives, then the venture capital industry will certainly pick up.”

What might be seen, however, points out Crabb, is the exit of many of the new firms that were set up to provide venture capital during the bubble.