Europe's venture capital industry recorded another dismal showing in the second quarter of 2008 with just 167 deals completed - the lowest quarterly total in at least nine years - and 858 million euro invested, a 35% drop from the 1.33 billion euro invested in 286 deals over the same period last year, according to Dow Jones VentureSource which released its Quarterly European Venture Capital Report. However, early stage rounds accounted for 44% of all deals done in Europe during the first half of the year, indicating that region may be nearing the bottom of its decline as more entrepreneurial companies are starting to enter the venture capital lifecycle.

"Much like in the U.S., the European venture industry is experiencing great softness in the IPO and M&A markets, and this is putting a damper on deal flow," said Jessica Canning, Director of Global Research for Dow Jones VentureSource. "In particular, health care companies, which have seen the pipeline of IPOs dry up over the last year, posted their worst quarter on record. We're seeing a similar downward trend for health care companies in the U.S., where investment has fallen off 31% in the first six months of the year."

By the Numbers: Tough Times for Traditional Investment Areas

According to the report, information technology (IT) saw deal activity fall 46% with 86 deals in the second quarter of 2008 compared to the same period last year, which saw 158 deals completed. Investments dropped 40% from 726 million euro last year to 435 million euro in the most recent quarter. The software sector, in particular, suffered the most as it posted its lowest deal count on record with just 34 deals and 168 million euro invested during the quarter.

Health Care investment in Europe fell 55% from 364 million euro in the second quarter of 2007 to 164 million euro in the most recent quarter with 32 deals completed, well behind the 58 deals done during the same time last year. Hit hardest was the biopharmaceuticals sector, which saw investment drop 59% to 117 million euro, the lowest amount on record, with just 17 deals completed, also a record low. After posting very strong investment in the first quarter of 2008, Europe's medical device sector came back to earth during the second quarter, as it saw only 13 deals completed and 44 million euro invested, 43% below the 77 million euro put into 17 deals during the same time last year.

The report showed that even Europe's Business & Financial Services industry, which had seen five consecutive quarters of year-over-year growth, couldn't escape the malaise as only 13 deals (another record low) were completed and 36 million euro invested, down 66% from the 105 million euro invested in the space during the second quarter of 2007.

Europe's Consumer Services industry fared better, however. It saw 13 deals garner 45 million euro during the second quarter, a nearly two-fold increase over the 23 million euro invested in nine similar deals during the same period last year.

Looking to the Future? Energy, Early Stage Deals Strong

Elsewhere, the data showed that Europe's Energy & Utilities industry saw record investment during the second quarter with 147 million euro put into 10 deals - making it the third-largest industry in Europe in terms of investment for the first time, just behind Health Care. The largest deal of the quarter was the 85 million euro later-stage round for solar photovoltaic cell-maker Sulfurcell Solartechnik of Germany. For the first time since 2001, Germany topped the list of European countries that received venture capital investment

"There is a silver lining in this quarter's figures and it's that we are seeing early-stage deals make up a greater percentage of deal activity in Europe," added Ms. Canning. "Venture capitalists are being very selective about the companies they back but they're by no means abandoning the European market. In the first six months of the year, 44% of venture deals in Europe were seed or first rounds - we haven't seen this level of early-stage interest since the first half of 2001."

Even so, the bulk of capital investment was still directed to second and later rounds during the second quarter, according to the data. Later-stage rounds accounted for 53% of Europe's total quarterly investment with 452 million euro put into 54 deals, while second rounds accounted for 20% of the total with 172 million euro put into 34 deals. With 201 million euro put into 75 seed and first rounds, early stage deals accounted for 23% of Europe's quarterly investment.

Boosted by the number of larger later-stage deals, the overall median deal size ticked up slightly from 2.9 million euro in the second quarter of 2007 to 3 million euro in the most recent quarter.

Geographic Perspectives

- Venture capital investment in Germany rose 29% compared to the second quarter of 2007 to 264 million euro in 29 deals, making the country the European leader in terms of investment for the first time since 2001.

- The normally strong United Kingdom market saw venture investment fall 49% to 193 million euro invested in 48 deals. The U.K. saw the most deals completed in the quarter and accounted for 29% of Europe's quarterly deal total.

- In France, investment fell 59% to 100 million euro while deal activity dropped 46% to 34.

- Likewise, capital investment in Sweden dropped 49% to 55 million euro with 11 deals completed in the second quarter.

- There were only six deals completed in Denmark, which saw investment drop 22% to 45 million euro.