Venture Investing, Euro-Style Maureen Farrell, 06.18.08, 6:00 PM ET

The European Union may not be anointed the next Silicon Valley anytime soon, but venture capitalists are definitely sniffing around.

While VCs plowed in 19.5 billion euros (30.3 billion U.S. dollars) into promising U.S. companies last year, nearly double the amount of venture funding captured by the E.U., many investors say more early-stage capital is funneling eastward. Indeed, VC investment in the E.U. grew 150% to 10.3 billion euros in the last decade, according to PEREP_Analytics, a pan-European data tracker. And unlike in the United States, where venture capital tends to pool near the coasts, Europe's early-stage investors write checks more evenly throughout the region.

One big reason the E.U. is gaining ground: "There are fewer [VC] players but every bit as much good technology," says Patrick Sheehan, a founding partner of Environmental Technologies Fund, a London-based VC firm. Better yet, the pickings have gotten better since the dot-com fallout in 2001 and 2002.

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"The post-bubble years were excellent, because values had come down a bit and businesses were better-managed," says Bernard-Louis Roques, co-founder of Truffle Capital, a Paris VC firm that invests in Internet, biotechnology and energy-related start-ups. E.U.-focused VCs backed off a bit last year, to be sure, thanks to the credit crisis--total investment in the E.U. fell 41% between 2006 and 2007--but the tide seems to be turning in 2008. "It has been a great year for investing," says Roques.

Europe traditionally hasn't been a hotbed of entrepreneurship, thanks to incentives like short work weeks, ample vacation time and pervasive pension programs. Then there's the fear of having to crack corporate hierarchies if you leave and come back.

"Unlike entrepreneurs in the United States who fail, in Europe, people worry about finding another job," says Thomas Hellmann, professor at the University of British Columbia's business school in Vancouver and expert in venture capital practices in Europe. "It's much more difficult to get back into the corporate career market once you leave."

That fear grips those thinking about working for start-ups, too, making talent harder to come by for E.U. entrepreneurs. "The most talented people don't necessarily consider entrepreneurial careers," adds Hellman.

But all that is starting to change, thanks in part to huge hits like Skype, the Luxembourg-based Voice-over-Internet-Protocol outfit launched with venture funding in 2002 and sold to eBay (nasdaq: EBAY - news - people ) for around $2.5 billion in 2005. "There's a new generation of entrepreneurs who are becoming more tech-savvy and not betting on careers where they stay in the same company forever," says Roques. Sebastian Wossagk, partner at Acton Capital Partners in Munich, Germany, concurs: "I've seen a lot more people who have had a first start-up [followed by] additional ones, whether the first was successful or not."

Using data from PEREP_Analytics, Forbes.com ranked the 10 most capital-inviting countries in the E.U., based on the ratio of overall VC investment as a percentage of each country's gross domestic product. The top five winners, in order: Denmark (with 314 million euros worth of VC investment, or 0.23% of GDP); Sweden (228 million euros, 0.21%); Finland (283 million euros, 0.19%); the U.K. (3.32 billion euros, 0.18%); and Switzerland (691 million euros, 0.17%). Northern Europe has the edge, thanks to an inviting combination of less bureaucracy, a more developed legal system, better accounting systems and easier ways to transfer intellectual property, says Marco Da Rin, associate professor in finance at Tilburg University in the Netherlands.

Life sciences dominate the VC scene in Denmark, accounting for 57% of overall venture investment, though the country's prowess in medical-device manufacturing has earned it (along with Sweden) the moniker Medicon Valley. Hot start-ups include 7TM Pharma, Egalet, NS Gene, and ACE Biosciences. Denmark invests its own tax money in venture capital through the Danish Growth Fund, which invests about 268 million euros ($412 million) per year in start-ups, primarily in life sciences.

The Deloitte Global Venture Capital Survey cites Sweden as an innovator in both biotechnology and "green" technology. The country has also had success commercializing pharmaceutical research (think AstraZeneca (nyse: AZN - news - people ) and Pharmacia, now owned by Pfizer (nyse: PFE - news - people )). One major player, venture backed-Biovitrum, which first sold shares to the public on the Stockholm Exchange in 2006, develops drugs to treat diseases including hemophilia, glaucoma and diabetes. To foster entrepreneurship, Sweden allows scientists to own the rights to discoveries whipped up in university laboratories.

Finland--an "innovation leader," according to the European Innovation Scoreboard, an annual research study on innovation in E.U. member nations--is a hotbed of activity in telecommunications, spurred in great part by cellphone giant Nokia (nyse: NOK - news - people ). Among the technologies developed: mobile application software and mobile networking platforms. Google (nasdaq: GOOG - news - people ) recently purchased Finnish start-up Jaiku, an online social network launched in February 2006.

The U.K. is perhaps the most well-rounded of the bunch, in terms of the breadth of VC-funded companies. Its hot spot: Cambridge University, also called "Silicon Fen" or the Cambridge Cluster. Among the start-ups that have hit it big: Arm, an international microprocessor manufacturer, and CSR, developer of Blutetooth wireless technology.

A leader in biotechnology and biopharmaceuticals, Switzerland boasts venture-backed hits like Actelion Pharmaceuticals (market cap: 4.3 billion euros), which develops drugs for treating pulmonary disease. (Ernst & Young dubbed founder Dr. Jean Paul Clozel the global entrepreneur of the year for 2008.) Last year, Addex Pharmaceuticals, another VC darling, went public on the Switzerland stock exchange and recently signed an agreement with Merck (nyse: MRK - news - people ) to develop a line of oral drugs to treat Parkinson's disease.

Will the E.U. spawn another Google? Maybe not, but that doesn't mean a lot more venture capital won't keep sloshing in. "Progress doesn't require extreme booms and busts," says Hellmann. "[The] venture capital industry will continue to grow with the tech potential of European Union. That's solid, but not spectacular."