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Despite the enduring bear market, we are still excited by the potential rewards that ensue when tiny technology stocks make it big. Ben Cobley surveys the current tech crop that are fuelling investors' fascination and greed

It is only 28 years since Bill Gates and a colleague got together in a Seattle garage with the idea of putting a computer on every desk and in every home, the result being the now omnipotent Microsoft.

Likewise, only 27 years have passed since venture capitalist Bob Swanson turned up at the offices of biochemist Herbert Boyer proposing to commercialise recombinant DNA technologies. Genentech, the company that was formed as a result, turned Boyer's initial $500 investment into one worth $500 million.

These, admittedly extreme, examples still serve to fuel the strange mixture of fascination, excitement and pure greed that propels us towards the more speculative end of the market. The risks may seem to be much higher than other investment options (even other small company options), but people of a certain ilk are forever fixated on the spectacular rewards that will ensue if their tiny technology investment pulls through.

Of course, for every innovative technology minnow that thrives, hundreds of potential winners fall by the wayside. Some just run out of funds, others run into difficulties with their technology. Many (probably the majority) fail to go about the commercialisation process the right way.

In the current market, many speculative technology ventures are finding it extremely hard to stay solvent, with customers nearly as hard to find as investors. However, as Michael Sandifer, a fund manager at New York technology specialist Amerindo, says, 'technology is something that doesn't go away'.

Sandifer's comment has particular resonance at present because even in the midst of this bear market, a welter of weird and wacky technology hopefuls have launched onto Aim. In 2002, a year that all agree was an awful one for flotations, 15 speculative technology ventures joined Aim alone, raising more than £80 million between them.

Saving the environment

Of these 15 Aim newcomers, six are biotechnology stocks, while the others offer a range of technologies from Image Scan's 3-D X-Ray scanners to Flintstone Technologies' portfolio of Russian technology prospects.

But, with legislation in the world's democracies becoming more and more environment-conscious, many entrepreneurs are coming to the market with products and services that have more to do with saving the environment than saving human lives.

Only waste-to-energy technology group Compact Power and new-fangled propeller prospect RingProp fit into this category from 2002's crop, but they joined a significant number of similar ventures already on the market.

Many investors will be familiar with automotive gearbox hopefuls Antonov and fully-listed Torotrak, both of which have been on the market for many years. These two companies both say that use of their systems cuts fuel emissions from vehicles and increases efficiency, and hope to license their technology to major manufacturers. Despite the grandiose plans, neither has delivered anything tangible in the way of revenues or profits. Some doubt they ever will.

Fellow automotive device developer Transense Technologies has also disappointed, seeing its share price collapse 97 per cent from its all-time high, due to long-running delays in its licensees' plans to go into production. Transense has developed 'surface acoustic wave' (SAW) devices for use in tyre pressure monitoring, which don't touch the tyre and, most importantly, don't require costly lithium batteries that pollute the environment when disposed of.

Meanwhile, American firm Clean Diesel Technologies has developed a catalyst to inject into diesel fuel, filtering out emissions of diesel particulate and increasing engine efficiency. Sales and licences are building up, though only £1.3 million of the £3.6 million raised at flotation was left in December, so more money will probably be required.

But there have been some notable successes in terms of sales, public profile and share price performance. Symphony Plastics Technologies, which is providing biodegradable plastic bags to the Co-op, Somerfield and Kwik-Save, is the classic example. Its innovative offering has attracted much publicity and, with orders at an all-time high, house broker Collins Stewart is expecting pre-tax profits of £600,000 this year, rising to £1.7 million in 2004. Last year, it lost £1.7 million.

Another to have attracted significant attention is Rotherham-based Inditherm, a developer of a cloth-like polymer that conducts heat equally across its surface. With sales building fast from a small base, and applications ranging from hospital patient blankets to pizza boxes, its prospects looks excellent. Profits are expected this year.

Virotec dazzles

There are several companies with lesser profiles than Symphony and Inditherm but which possess similar – if not greater – potential. One is Virotec International, which could lay a decent claim to being the most environmentally-friendly company listed in London.

It has developed the means to clean up toxic waste and contaminated water.

Perhaps unsurprisingly given that country's success at so many things, Virotec is based in Australia. But the potential for its geochemical and engineering technology is truly worldwide and promises substantial future returns for investors prepared to play the long-term game.

Understanding how that technology works is not particularly easy, partly because of the downright breadth and diversity of its various applications.

At the moment it is concentrating mostly on a couple of ingenious and interrelated geochemical processes. One of these, called Basecon, is able to turn the toxic 'red mud' produced as a by-product of alumina manufacture into transportable waste product. The other, called Bauxsol, actually uses that same waste to clean up contaminated water supplies, like those produced from mining operations.

The latter process is carried out after sampling the metal content of the water and developing a special chemical formula that is then sprayed onto the water. Within a month all the relevant metals will have been formed into a benign residue situated at the bottom of water that is apparently, by then, drinkable.

The group has been conducting its first commercial test of the Bauxsol technology at a 'tailings mine' in Portugal. Julian Tolley, a speculative technology specialist at Virotec's newly-appointed house broker Numis, says that 'all we have heard is good news so far, though one would hope that the test goes well'. If it does, the current market capitalisation could start to look very cheap indeed. In addition to its core markets, the company has also been developing products and services for use in agriculture, sewerage, aquaculture and tanneries (which have substantial problems with arsenic).

Tolley is also keen on another client, Pursuit Dynamics, and has set a target price of 150p for its shares, against a current 31.5p. This is despite saying of the company and fellow Aim constituent Corac that 'they really are two of the most daft things ever'.

Pursuit's appeal is based on more Australian wizardry, though the company is based in Britain. It holds the intellectual property rights to a device that has the potential to replace the motor, clutch, gearbox, drive shaft, propeller and rudder in a boat with a system that has no rotating parts under the water. Theoretically, the system is capable of efficiencies that exceed existing marine propulsion systems. It also uses a steam-generating device and a revolutionary method of delivering thrust.

The original target market for this was in marine outboard motors, but substantial interest from a wide range of industries has widened the remit much further, with water and sewage treatment firms now seen to be the most likely to adopt it in the short term.

The company actually seems to be one of those rare speculative entities that is beating its own expectations rather than falling behind. Indeed, on one occassion when the Fire Brigade was called to investigate a pipe break at Pursuit's Royston facility, they were so interested in the potential for improving their own pumping systems that they are now in talks with Pursuit themselves.

Pursuit's first sales are expected this year under licence and Tolley predicts that pre-tax profits will be made in 2006 or 2007. Cash will also probably be required within two years.

In its original market of marine outboard engines, Pursuit has competition from RingProp, the recent new issue headed by City financier Johnny Townsend. It has developed a new ringed propeller that encloses the blades on an outboard motor, thereby stopping them from harming wildlife. Interestingly, it is mooted that water authorities in the United States and Australia are keen to bring in legislation to make RingProp type devices compulsory in an effort to protect wildlife.

Ofex and VCT opportunities

Over on the Ofex facility, plenty of high-tech companies are plying their trade to greater or lesser acclaim. Despite having disappointed in terms of getting its product to market in volume, Disperse Technologies is one of its better speculative technology prospects, having secured a number of clients from whom it receives royalties, including Estée Lauder.

What the company has done is develop a range of 'dispersions' that can be used to blend fluids that might not otherwise mix. This may sound like a particularly arcane thing to do, but such agents are actually vital in cosmetics manufacture and have a large variety of other uses too.

But they are hard to develop and can cause many problems – for instance, they can cause irritation when they come into contact with human skin. Disperse's 'Advanced Topical Dispersion' (ATD) products don't present these problems and are also apparently cheaper and easier to use for manufacturers.

Estée Lauder, Bath & Body Works and Davlyn Industries all have the products due to launch using ATD technologies this year and a new licence was recently signed with manufacturing services group Cosmetic Essence.

Chief executive Derek Wheeler adds 'our first licences from the use of our TFE technology should be finalised during the next few months.' TFE stands for Thin Film Encapsulation and gives products a highly-controlled release of oil-based chemicals, for example, cosmetics or pharmaceuticals.

With all of this in train, executive chairman Colston Herbert comments that the company is 'firmly on target to achieve our objective of moving into profit in the year ending 31 August 2004'. This is behind previous schedules, but the longer-term expectation is that further use of its many patents will make Disperse highly profitable in a few years time.

'I think it's a humdinger of a technology...and it's becoming big enough, now too,' says Julian Tolley. If progress is good, it is only a matter of time before the company moves up to Aim, where it will be able to attract more institutional investors.

Both Aim and Ofex are perfectly suited for such speculative technology, with Enterprise Investment Scheme (EIS) and venture capital tax breaks encouraging investment by private investors and institutions alike. All of the individual companies mentioned above qualify under these rules, except fully-listed Torotrak.

But, investors looking to get into UK technology companies at an earlier stage should consider investing in venture capital trusts that specialise in technology. At the moment three such VCTs are seeking money, with Oxford Technology 3 and Quester 5 both looking to invest at an early stage of development and Enterprise A intending to back later-stage ventures in order to reduce risk.