Venture capital (VC) investment in UK IT companies saw dramatic growth last year driven by rising adoption of new media technologies.

A 42 per cent growth in investment between 2005 and 2006 was the second largest increase across all sectors, according to a survey by researcher Library House.

The fastest growing sector, with investment up 91 per cent in value from 2005 to 2006, was services and retail.

The report, commissioned by UBS Wealth Management, found other sectors changed little from 2005, although investment in healthcare and life science companies fell slightly.

But the increase in retail sector funding may also have been boosted by the emergence of the internet providing new routes to market.

The growth in deal volume was similar, suggesting that as well as attracting more funding, IT companies have also been responsible for a larger number of deals.

Across all sectors in 2006, 1,668 venture-backed UK companies raised a total of just under £1.4bn, an increase of 27 per cent from 2005, according to Library House.

The increase in VC activity was due to factors such as investors recovering confidence since the low ebb of 2002, and significant fundraising activity in 2005 leading to more money being available the following year.

Although 2006 was a good year for UK VCs, there is still a persistent gap between the levels of activity in Europe compared to the US that suggests problems, said Library House chairman Doug Richard.

‘The most pressing of these problems is the lack of proof-of-concept readiness funding in the UK and Europe which results in a smaller pool of investable opportunities here,’ he said.

‘With the rise of China and India, tackling these problems becomes an urgent necessity.'

The Chinese venture capital market overtook the UK during 2006 and India is expected to follow by 2009.

The US VC market continues to be approximately three times larger than the UK on a per capita basis.

Although the UK is leading Europe, the key competition is from the US and Asia.