Six year ago, German venture capital was a growth industry, and Munich was its epicentre. “I remember in 2000 walking into a First Tuesday meeting and seeing 1200 people there,” says Kurt Mueller, founder and partner of Target Partners, a Munich-based venture capital firm.

It seems a distant memory. Later that year First Tuesday, the monthly networking event for enterpreneurs and venture capitalists founded in 1999 closed down in the wake of the doctcom crash. German venture capitalist were hit hard by the downturn, too.

A number of firms did not survive. The BVK, the country's industry association, estimates that around 10 percent of the venture capital funds active in Munich five years ago have disappeared. For the remaining groups, fundraising has been difficult.

Hendrik Brandis, managing partner of Earlybird Venture Capital, which has offices in Munich, Hamburg and Menlo Park in California, says: “Before the dotcom crash, there was an overwhelmeing sense of optimism, that one could walk on water. That attitude has disappeared. Now investors are more humble, professional and reasonable.”

However, those who stayed in Munich and endured despite the shakeout have since witnessed a recovery. Deal flow, say locals, has been strong, especially this year. Investment in the technology sector increased by 45 percent to €584 million ($765 million) in the second quarter, the largest injection of capital into the sector since the second quarter of 2002. according to research by Ernest & Young.

There may be more to come. Kurt Mueller, who founded Target Partners in March 2000 before the fallout of the crash, believes that Germany today is one of the most overlooked investment locations in the world. After the US, Germany produces the highest number of patents and is the biggent exporter, he points out.

He says: “Ther is not much venture capital in Munich compared to the USA or Israel. There's also less venture capital relative to the opportunities, which makes for attractive valuations. You can find entrepreneurs with experience and good opportunities for a lot less money than elsewhere.”

Hoping to capitalise on these opportunities, Target Partners has made 17 investments since 2000. The firm has also completed five exits, generating an internal rate of return in excess of 93 percent, according to Mueller.

Deal flow and asset pricing are not the only factors Munich-based practitioners cite in Germany's favour. Mark Wegter, a partner at biotechnology-focused venture capital firm Life Science Partners, says uncertainty over the country's tax system, which deterred investors three years ago, has been resolved. This, as well as “great universities, a good quality of life and proximity to Switzerland,” makes Munich the ideal place for information technology and biotechnology investment, he says.

Local wrk ethics should also attract investors, practitioners say. Uli Fricke, managing general partner and founder of Triangle Venture Capital, says that German workers are loyal employees and notes that investors in growth companies do not come up against the trade unions that are common in larger corporations.

What Fricke wants to see now is more early-stage venture capital investors coming to Germany to help foster quality growth companies that will eventually qualify for later-stage investment.

Such inflow, however, should best happen at a measured pace. Mueller warns of the damage that a flood of investment could do. “It was perceived in 2000 that Germanay was a good place for capital but investors put in far too much. There are limits to how much you can put in before you ruin it,” he says.

Wegter adds: “In the past, the government has put a lot of money into companies through subsidiaries and grants. That was part of the problem. It was too easy for early-stage companies to get finance. This created competition, undermined margins and led companies into bankruptcy.”

Now certain industry sectors are once again attracting keen interest, particularly information technology and internet-related industries. Earlybird for example has five dotcom businesses in its portfolio, including Tipp24, an online lottery and gaming site based in Hamburg, and Interhyp, a Munich-based online mortgage service.

Brandis is optimistic that when the time comes to realise these investments, the exit routs will be there. “Last year 36 percent of venture-backed initial public offerings took place in Germany,” he notes. To anyone planning to float portfolio companies in Germany, that is an encouraging statistic.