Small companies, especially those built around new technologies, are the flavour of the month in many countries. Small and medium sized enterprises or “SMEs” are said to be quicker than large companies when it comes to bringing new science to market and creating new jobs. The trouble is that SMEs, unlike large companies, rarely have the money to fund their growth.

The venture capital industry is there to provide that cash (see ). Figures from the British Venture Capital Association show that some 295 high-technology companies in the UK received a record £690m of venture capital investment in 1997 – the largest sum for any industry grouping. Despite such large sums being available, physics-based companies can find it difficult to raise capital. It is much easier for investors to back a business built around biotechnology or software, for example. Both sectors have their own specialist funds, not to mention separate categories in stock exchange listings.

It is not so much that investors reject physics. Rather, there is not the track record of success that investors like. There are simply too few examples of ideas that have gone from a university physics department, say, to become major commercial ventures. In comparison, countless academics have biotech and software millionaires.

Someone with fresh wounds from raising funds for physics-based ventures is John Campbell, chief executive of Investech, a small investment company that advises small high-technology firms. Campbell recently played a major part in persuading 3i, Europe’s largest venture capital company, to invest £2m in a small business called Printable Field Emitters. The company hopes to develop field-emission display technology for application in large-area flat TV and information displays (see Physics World June 1997 pp45-48). “It was not easy at all, ” says Campbell of fund raising. “We tried something like 20 or 30 sources of finance and got nowhere. In the end, 3i came up trumps.”

The experience of Printable Field Emitters underlines several important factors. 3i had previously turned down the idea, and only began to think again when experienced directors like Campbell – who recently retired as chief technology officer of Cookson, the high-tech materials company – came on board. Changes in the management of a company may also be necessary. “You need a different type of management to run a company than you do to found it, ” says Campbell.

One problem when it comes to ideas-based companies, says Campbell, is that it can be hard for investors to see where an idea will go, what the market will be, and how to set up production. It is difficult to persuade investors that a handful of patents is valuable and even harder to convince them to put money into completing the science. “It is easier to raise money for businesses that have got a product that the customer is buying, ” he says.

Dave Cheesman agrees with this view. He works for Advent, one of the UK’s leading venture capital funds, and for TriTech Investment Managers, who deal with the smaller investor. “We do look at physics-based businesses, ” says Cheesman, but he acknowledges that it is harder to raise money here than in biotech and software. For a start, he points out, “the gestation time is often very very long” for start-ups in areas such as physics and materials. And some ideas from physicists simply need more money than even the most adventurous investors will cough up. Cheesman talks of one “big ticket” idea that would have needed £50m just to try it out. Only governments can afford this sort of money and it is a waste of time approaching the City for such ventures, he warns.

It can also be difficult to chart the manufacturing steps and processes that a company will need before an idea becomes a product. In areas such as biotechnology, however, the route to market is well-defined. Moreover, the financial returns can be much larger. Physicists and biologists also differ in their attitudes to business, Cheesman believes. “Physicists are less commercial, ” he says. “There are role models in the biotechnology industry who have gone forward and made a lot of money.”

It is not that venture capitalists want to invest only small amounts in an idea, rather that anything less than about £250, 000 is too small to justify the effort needed to assess and monitor a company. This leads to the infamous investment gap. Would-be entrepreneurs can usually get the money needed to fund the first step, but it is much more difficult to raise amounts of between about £50,000 and £250,000

One way to plug the gap is to apply for a SMART award from the government to commercialize an idea for a new product. “I know of companies where [an award] has saved the day, ” says Cheesman. The future of such schemes is currently being discussed following the publication of a consultation document, Innovating for the Future: Investing in R&D, earlier this year. Indeed, the fact that the Department of Trade and Industry and the Treasury worked together on the document is seen as nothing short of a miracle in some circles.

Recent months have seen several government initiatives in this area. The University Challenge fund was announced in March. And in June, the chancellor, Gordon Brown, unveiled a trio of new venture capital funds, worth a total of £240 million, to support small and medium sized businesses (Physics World July p11). However, most of the money for these initiatives is coming from the private sector – either charitable foundations or venture capital firms.

Meanwhile, Sir Peter Williams, chairman of Oxford Instruments, one of the UK’s leading physics-based companies, is chairing a working group that is examining the financing of high-technology companies. Sir Peter promises that the group’s report, due for publication later this year, will offer some radical suggestions on the financing of high-tech companies.

If anyone knows the problems of financing a company with physics at its heart it is Williams. After three days solid telling the City about the company’s results, he threatened to change the company’s name to Oxford Bioinstruments. Williams was joking, of course, but his remark underlines the problems that physics can face in the world of finance.