Venture capital (VC) investment in Europe’s next-generation media technology sector took a nosedive at the end of last year, plummeting 52 per cent in just three months.

In the previous quarter, VC funding had risen to €252m (£187m) ­ its highest level in two years. But the drop to €121m (£90m) in the final period leaves the total for 2007 at €716m (533m), one per cent down on 2006, according to figures from researcher Library House.

The decline comes amid slowing investment across all sectors, but raises questions about what was increasingly tagged as the next major technology market, said Library House senior analyst Chris Coffman.

“The big picture from 2006 to 2007 is that media/tech investment was fairly steady overall, but on the basis of the first three quarters one would have expected it to grow,” he said.

In the wake of the credit crunch, it is no surprise if investors are cautious. But an overcrowded market and unproven business models are also to blame, according to Coffman.

“Investors are pulling away partly because of broader economic trends, and partly to see if these companies can make money,” he said. “In the case of online video, well-funded competitors are battling it out for whatever market share YouTube doesn’t have. But take-up has been slow and many suffer from a lack of content.”

There have been several large deals in the online video sector, without any guarantee of a return ­ raising the spectre of the late 1990s dot com rush.

Media web sites rely largely on advertising income. But attracting ads has become increasingly tricky, said venture capitalist Stewart Davies.

“There is a whole new generation that has come up with ideas and then assumed that they have a business,” he said.

“But the opportunities for receiving sponsorship are diminishing rapidly.Advertisers have become smarter and they want to know how many ‘eyeba lls’ they will
receive for supporting your service.”

Big deals in 2007 included online TV site Joost’s £22.6m funding, and hosting tool Daily Motion’s £16.9m.