Malcolm Young and his team at drug discovery company e-Therapeutics have every reason to be happy.

Against a macroeconomic backdrop of market crashes and pursed-lipped financiers sitting on their hands and shaking their heads, the CEO has persuaded Octopus Ventures to put up £2 million to back the next stage of this AIM-listed business’s development.

The company is firmly rooted in the North East. Its head office is in Newcastle and Young himself left Cambridge to become a professor of neuroscience at the city’s university, where he spun-out e-Therapeutics in 2003.

Regional renaissance

It’s a classic example of the type of entrepreneurial business which organisations in the North East have planned, encouraged and financed as a way to bring economic regeneration and, above all, jobs and money to the region.

Young confirms: ‘We got our first bit of proper investment from North Star Equity investors (NSEI) which provided £90,000 for us at the “proof of concept” stage.’

From there, the company was able to build a good enough story to bring other investors on board. In 2005, it raised money from RAB Capital, which owns 30 per cent of the business, with Newcastle University a 12 per cent shareholder and Young himself retaining 37 per cent. Two years after that, it listed on AIM.

Marion Bernard, chief executive of NSEI, is happy to describe e-Therapeutics as ‘a very good example of what we’re about’.

Similar to Young, Bernard is a convert to the North East. She was born in the south and then was a student in Newcastle and later worked with investment giant 3i in the region. She is a real enthusiast, waxing lyrical about how the ‘region is vibrant, ambitious and has a “can-do” mentality.’

Bernard has spent many years building up NSEI as an early-stage investor in entrepreneurial businesses, especially technology businesses, in the region. Since its launch in 1994, NSEI has backed 176 companies at the ‘proof of concept’ stage and it also has provided funds for 35 companies at the co-investment stage.

‘Proof of concept’ money consists of providing up to £90,000 to allow a business to demonstrate a product or an idea that can be built and sold. Money of this type is notoriously difficult to find, so with a venture capitalist like NSEI willing to provide it, the North East has a firm financial foundation.

Affirms Bernard: ‘The risk in backing an enterprise as a fund is: “Can you build a world-beating technology business from early stage funding in the North East?” The answer is “Yes”.’

Tyne for growth

Despite some serious economic problems (its unemployment rate is one of the highest in the UK), the region has particular strengths. For a start, there are five universities in the area – Durham, Newcastle, Sunderland, Northumbria and Teesside, each of which has a very strong science portfolio. This academic stronghold leads to many opportunities for spinning out ideas to form the basis of businesses and provides the backbone for a knowledge-based regional economy.

In terms of sectors that have staying power, Bernard highlights digital technology, communications, health, biotech, energy and the environment.

Tim Pain, manager of enterprise support, start-ups and small business at regional development agency One North East, concurs. ‘The North East has a strong history in the process industries [around Teesside] such as chemicals and pharmaceuticals, but these are large companies. There is also lots of activity around renewables, wind turbines and electric vehicles, for example, because of the region’s engineering expertise.’ Other sectors that are flourishing, according to Pain, include IT and software, plus health and life sciences.

The trick is to ensure the finances are available to nurture and develop this expertise. One North East has several levels of help for businesses, starting with grant and one-off funding, typically at the £10,000 level, delivered through the local Business Link service.

There is also a funding scheme to support manufacturers, providing up to £100,000.

Currently the agency is talking to the government, European Community and European Investment Bank to put together a Joint European Resources for Micro to Medium Enterprises initiative (Jeremie Fund), which would provide funds of £125 million for the region, but this is going to take around 12 months or so to put in place. Finally, there are government provided grants (£10,000 plus) for business investment, such as capital items, which will be placed if there is an element of job creation and job safeguarding.

Aside from NSEI, there are two other specialist venture capital firms in the North East: Northern Venture Managers and NEL Capital. The latter runs the £30 million North East Investment Fund and the £5 million NEL Growth Fund.

Barrie Hensby, chief executive of NEL, promises that there is £3 million available in mezzanine finance for businesses in the North East during 2009. ‘Mezzanine finance requires predictable cash flow and therefore we are looking for reasonably established businesses with a good short-term outlook.

‘Funds are provided to effect a step change in the business – a new product, a new market, an MBO or MBI.’ Typically, interest rates would be about ten per cent and there would be a ten per cent equity option, such as a warrant. But the terms are negotiable.

Angels of the North

NSEI, too, has funds available for 2009 – £2 million for the Proof of Concept fund and £7 million for the North East Co-Investment Fund, which it manages. Both Bernard and Hensby agree that the one area of funding where perhaps the North East is less well developed than other regions is investment provided by business angels or serial entrepreneurs and private investors, other than very small-scale offerings. Hensby points out that there are two groups, Entrust and the Business Investors Group, both of which have been around for many years.

The attitude of the workforce has also been identified as a strong factor in the region’s resurgence. Nick Green is the CEO of Tangent Communications, which bought a digital printing business, Ravensworth, located in Newcastle in 2007. ‘The team in Newcastle are incredibly passionate – consistent with people that I have met from the North East. The job market there is not as robust as, say, in London, so you can build a longer relationship with a team in the North East as the other opportunities are not so wide.’

Mark Cambridge, CEO of Zytronics, which manufactures touch screens and sensors, has seen the benefits of being based in the North East as he’s seen the business grow, ‘although it’s not a hotbed of electronics talent and it can be difficult to attract high-calibre electronics people to the area’.

Young agrees: ‘The quality of life is great, but persuading high-quality people to come and look is difficult.’

Bernard is convinced that the positives outweigh the negatives: ‘The skills base, people, environment, quality of life, low cost of premises, grants and the communications are all good.’

So perhaps sceptical entrepreneurs should cast aside their notions of flat-caps and hairy-armed steveadors and take a good close look at what the burgeoning business environment of the North East can offer.