It’s not the best time to be an internet entrepreneur if you need funding. Thanks to a global recession, investment is pretty hard for most new startups to come by.

In the United States, which has the most robust VC market, investments by VCs plummeted in Q1 2009, reaching their lowest level in 12 years. VCs are focusing on their existing investments, being far more conservative when it comes to making new investments and are increasingly asking more of entrepreneurs, both in terms of investment criteria and deal terms.

The VC market has always been more limited in Europe, even though Europe has no shortage of highly-successful internet startups and there are Europe-based VC firms with plenty of capital.

In an attempt to capitalize on the downturn and to giving promising young internet startups in Europe the opportunity to get going in this tough environment, a number of successful founders have started a new fund, European Founders Capital (EFE).

EFE is the creation of founder Brent Hoberman and Bebo co-founder Michael Birch. The fund is launching with £20m, an amount that Hoberman and Birch plan to raise to £50m in the immediate future. Rogan Angelini-Hurll, a friend of Hoberman’s, and Peter Dubens, who built Pipex’s ISP business, are also involved.

Birch, who became one of the few founders of a Web 2.0 startup to hit the jackpot when AOL acquired Bebo for $850m, says that all of the funding is coming from founders:

We aren’t taking institutional money. All the money comes from founders – people who have done it before.

That could make for an interesting dynamic.

Obviously, the EFE fund is relatively small compared to many of the VC funds that exist, so it’s certain that EFE will be focusing on early stage investments and its investment size will likely fall somewhere between those typically provided by angels and traditional VCs. More and more firms in the US have been started to fill this niche so it’s nice to see a fund in Europe doing the same.

The questions, of course, are whether EFE can generate good dealflow and leverage its founders’ experience and connections to the benefit of portfolio companies. While there’s still a lot of innovation taking place amongst startups today and great companies will certainly be born during this recession, it’s unclear what the ‘next big thing‘ is and there’s a lot of uncertainty around many of the popular online business models today. And while a lot of VC firms have made it a habit of pitching the intangibles they bring to the table, many have fallen short when it comes to applying them at their portfolio companies.

I look forward to seeing how EFE progresses and whether more firms like it pop up. At the very least, given the past successes of the founders, it will be interesting to see where they decide to put their money.

Photo credit: via Flickr.