‘£4.5bn investment prize’ if UK physics deep tech can build scientist-investor relationships

A new report from the Institute of Physics (IOP) reveals the UK’s physics deep tech sector could secure billions in potential investment by placing itself at the heart of the UK’s industrial strategy and encouraging better understanding between investors and innovators.

Analysis of the UK’s venture capital (VC) industry by the IOP has found businesses based on physics deep tech in the UK economy would unlock a potential £4.5bn in investment if they were able to attract funding at a similar level to other sciences.

The research project, which has spoken with more than 30 leading VC investors and UK science-led businesses, found confusion on both sides of the investor-innovator divide. VC investors and their funders struggle to invest in physics deep tech, despite seeing its vast potential, because start-ups based in this important sector often do not follow the familiar lifecycle of other branches of science such as biotech.

And despite that fact that the UK has the largest VC market and highest levels of startup and spinout activity in Europe, the IOP’s analysis shows that larger VC investments in physics deep tech are still quite rare.

The report argues that this lack of investment is a real problem for UK entrepreneurs trying to build businesses in some of the most promising sectors in the global economy based on physics deep tech, which include the fields of quantum, semiconductors, AI and nuclear fusion.

By getting the investment in physics deep tech up to levels enjoyed by other sciences the IOP estimates an extra £4.5bn in funding would be unlocked over the next five years.

The analysis identified five key barriers that are currently preventing physics deep tech from getting investment at the same level as comparable sciences.

They were: 

• physics businesses are not always able to transition from being technology-focused to product-led early enough to attract large-scale investment;
• businesses tend to lack a “one size fits all” lifecycle from innovation to profitable product;
• many venture capitalists and limited partners are unfamiliar with the unique characteristics of physics deep tech, including its technologies, timelines, and return profiles;
• there are problems in the support available through mechanisms such as research and development grants and debt financing, which are not effectively supporting physics deep tech businesses, especially in the early stages; and
• physics deep tech companies have difficulty securing late-stage investment. 

To overcome these barriers and unlock the sector’s true potential, the IOP is calling for a coordinated effort from government, investors, business leaders and the scientific community to develop tailored investment pathways to address the unique needs of physics deep tech. 

The report argues government should be seeking to do more to use public procurement to better support physics deep tech and should also ensure grant, equity, and debt-financing mechanisms work effectively together to support physics deep tech at all stages of development. 

It says the government also has a role to play in increasing the participation of international investors and corporate VC in UK physics deep tech and that investors and businesses should work together to create clearer commercialisation pathways. 

And it also pledges the IOP will play a role, by continuing to work with partners to elevate the visibility of successful physics deep tech businesses, helping them to attract investment from both UK and international VC firms. 

Tom Grinyer, IOP chief executive, said: “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 move us to a lower carbon, more sustainable economy. Today’s report has identified some practical steps that can help bring scientific innovators and venture capitalists closer together. 

“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. 

“It’s also essential that this relationship between investors and innovators forms an important part of the government’s industrial strategy. If we get this right, we have an opportunity to supercharge the UK economy and position ourselves as a global leader in the technologies that will define the next industrial revolution.” 

Writing his foreword to the report, tech entrepreneur and founder of Acorn Computers, which produced ARM, the UK’s first $100bn tech company, Dr Hermann Hauser, said: “From soft bioelectronic medical devices to treat heart failure to new semiconductors that improve the energy efficiency of solar panels and quantum technologies for defence applications, innovations that are powered by physics are crucial in addressing global challenges in health, climate change and security. 

“Despite the UK being a global leader in venture capital and having a strong foundation for commercialisation of the UK science base, the new evidence from investors in this report has uncovered issues within the system that are holding back UK venture capital investment into physics deep 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. 

“The prize is too big to miss; increased investment, economic growth, and solutions to some of our biggest societal challenges – moving us towards a better world for future generations.”