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Business and innovation

Business and innovation

Institute of Physics says physics ‘deep tech’ missing out on £4.5bn of extra investment

26 Nov 2024 Michael Banks
cartoon illustration of people, money and ideas
Ideas industry: a new report by the Institute of Physics finds an extra £4.5bn of extra funding for physics “deep tech” businesses could be unlocked. (Courtesy: Shutterstock/Sentavio)

UK physics “deep tech” could be missing out on almost a £1bn of investment each year. That is according to a new report by the Institute of Physics (IOP), which publishes Physics World. It finds that venture capital investors often struggle to invest in high-innovation physics industries given the lack of a “one-size-fits-all” commercialisation pathway that is seen in others areas such as biotech.

According to the report, physics-based businesses add about £230bn to the UK economy each year and employ more than 2.7 million full-time employees. The UK also has one of the largest venture-capital markets in Europe and the highest rates of spin-out activity, especially in biotech.

Despite this, however, venture capital investment in “deep tech” physics – start-ups whose business model is based on high-tech innovation or significant scientific advances – remains low, attracting £7.4bn or 30% of UK science venture-capital investment.

To find out the reasons for this discrepancy, the IOP interviewed science-led businesses as well as 32 leading venture capital investors. Based on these discussions, it was found that many investors are confused about certain aspects of physics-based start-ups, finding that they often do not follow the familiar lifecycle of development as seen other areas like biotech.

Physics businesses are not, for example, always able to transition from being tech focussed to being product-led in the early stages of development, which prevents venture capitalists from committing large amounts of money. Another issue is that venture capitalists are less familiar with the technologies, timescales and “returns profile” of physics deep tech.

The IOP report estimates that if the full investment potential of physics deep tech is unlocked then it could result in an extra £4.5bn of additional funding over the next five years. In a foreword to the report, Hermann Hauser, the tech entrepreneur and founder of Acorn Computers, highlights “uncovered issues within the system that are holding back UK venture capital investment” into physics-based tech. “Physics deep-tech businesses generate huge value and have unique characteristics – so our national approach to finance for these businesses must be articulated in ways that recognise their needs,” writes Hauser.

Physics deep tech is central to the UK’s future prosperity

Tom Grinyer

At the same time, investors see a lot of opportunity in subjects such as quantum and semiconductor physics as well as with artificial intelligences and nuclear fusion. Jo Slota-Newson, a managing partner at Almanac Ventures who co-wrote the report, says there is “huge potential” for physics deep-tech businesses but “venture capital funds are being held back from raising and deploying capital to support this crucial sector”.

The IOP is now calling for a coordinated effort from government, investors as well as the business and science communities to develop “investment pathways” to address the issues raised in the report.  For example, the UK government should ensure grant and debt-financing options are available to support physics tech at “all stages of development”.

Slota-Newson, who has a background in science including a PhD in chemistry from the University of Cambridge, says that such moves should be “at the heart” of the UK’s government’s plans for growth. “Investors, innovators and government need to work together to deliver an environment where at every stage in their development there are opportunities for our deep tech entrepreneurs to access funding and support,” adds Slota-Newson. “If we achieve that we can build the science-driven, innovative economy, which will provide a sustainable future of growth, security and prosperity.”

The report also says that the IOP should play a role by continuing to highlight successful physics deep-tech businesses and to help them attract investment from both the UK and international venture-capital firms. Indeed, Tom Grinyer, group chief executive officer of the IOP, says that getting the model right could “supercharge the UK economy as a global leader in the technologies that will define the next industrial revolution”.

“Physics deep tech is central to the UK’s future prosperity — the growth industries of the future lean very heavily on physics and will help both generate economic growth and help move us to a lower carbon, more sustainable economy,” says Grinyer. “By leveraging government support, sharing information better and designing our financial support of this key sector in a more intelligent way we can unlock billions in extra investment.”

That view is backed by Hauser. “Increased investment, economic growth, and solutions to some of our biggest societal challenges [will move] us towards a better world for future generations,” he writes. “The prize is too big to miss”.

Copyright © 2024 by IOP Publishing Ltd and individual contributors