Small is beautiful, if you have a sense of adventure

It is increasingly widely acknowledged that smaller, privately- owned companies are where the action is in British business. Their nimbleness, enthusiasm and ability to innovate and take risks away from the spotlight of the stock market are reckoned to put them in a position to compete with the world's best.

The success of the "Independent 100" annual survey of fastest-growing private companies, compiled by the Independent on Sunday with accountants Price Waterhouse and now in its sixth year, demonstrates that plenty of these companies are prospering at a time when their larger, better-known counterparts are struggling. Many that have appeared in past rankings have either gained quotations or been acquired by public companies eager to obtain their expertise.

However, there is little evidence that this success is being backed by hard cash. Though recent years have seen a growth in interest in venture capital and "business angels", or wealthy individuals who invest in private companies, most public attention on investing is still devoted to quoted companies. Many of the Independent 100 successes have funded growth through investing their own earnings.

As with many other things, this appears to be more the case in Britain than elsewhere. Research just published on corporate venturing - the creation of a symbiotic relationship between a large company or venture capital fund and a small company to carry out specific research and development initiatives - suggests that Britain lags behind both the United States and Japan in drawing up lists of industries that are seen as essential for the long-term good of the country.

The report Gateway to Growth, written by David Gebbie, a partner at the London law firm Withers, and based on research by City University Business School, says that such a situation threatens the UK's research and development strategies. It points to research showing that R&D expenditure of large corporations is four times less efficient than the R&D spend of smaller firms. Moreover, in the US most product innovations come from companies with fewer than 1,000 employees.

The lesson is clear: large organisations need to get involved with smaller ones - through takeovers, acquiring minority investments or strategic partnerships, as well as becoming more entrepreneurial in structure. Pharmaceutical companies such as Glaxo have started down this route by taking stakes in biotechnology companies, for example, while media and telecommunications companies also see this as a way ahead.

But, as the report points out, such thinking has not yet found favour with industry as a whole. Although the management trend for outsourcing of non-core activities combined with recent incentives, such as venture capital trusts, has created the right sort of environment, there is little sign of British companies moving towards a situation like that of Nippon Steel, which has such a diversified range of investments that it is estimated that 10 per cent of its 1995 turnover was derived from biotechnology and 20 per cent from electronics and data communication.

According to Douglas Brown, who has justtaken over as chief executive of the global private equity investor Advent International, the situation owes a lot to Britain's comparatively under-developed private equity market. While the US, for example, has had data on it for years, Britain has only just started to become mature enough to produce detailed figures.

As one of the world's largest private equity investors, Advent has more than $2.5bn under management in 30 countries around the world. The US, where the Boston-based operation has established strong relationships with large institutions, such as GE Capital, and funds, still accounts for the lion's share of its investment. But Mr Brown, who has taken over from the organisation's founder, Peter Brooke, is looking increasingly at Europe. As a comparatively under-developed market, it is attractive to an organisation like Advent, which plans to devote a large share of its activities there this year. Some of this year's expansion will come from such emerging markets as central Europe and Latin America. But - perhaps reflecting that investing in private equity does not necessarily make you court risk - the core activity will be established markets.

Mr Brown, who worked in London in the early Nineties as head of Advent's European operations, is particularly aware of the UK scene. The biggest concern, he said, stems from the combination of increasing popularity of equity investing and a buoyant stock market. "There's tremendous pressure to put money on, and the prices of deals are starting to push up," he added.

His organisation confirms the Withers belief that Britain and the rest of Europe lag behind the US in corporate venturing, pointing out European companies are less inclined to see the urgency of changing.

As Mr Gebbie says, "The current investment criteria used in the UK are a cause for concern in relation to our overseas competitors. If today's innovation is to be turned into the industries of tomorrow the larger UK corporates need to reassess their long-term investment strategy."

The Independent 100 ranks fast-growing private companies according to sales growth over five years. Applications to appear in this year's listing need to be received by 1 March. For details contact Julie Harwood at Price Waterhouse, Southwark Towers, 32 London Bridge Street, London SE1 9SY.