Inventor's dream becomes reality: Russell Hotten meets the head of a company whose product sounds like science fantasy

EVEN as a student demonstrating his invention on BBC's Tomorrow's World, Jon Waldern had his sights on exploiting its commercial value.

Almost 10 years ago the world's first virtual reality prototype machine made its television debut, the result of Dr Waldern's research for his doctorate at Loughborough University. A space-age toy on a space-age programme.

But not any more. While virtual reality - enabling someone wearing a headset to experience a computer-generated three-dimensional environment - sometimes sounds like science fantasy, the market potential is not.

This morning Virtuality, the company Dr Waldern, aged 33, formed to manufacture the machines and software, begins trading on the stock market through a placing of 28.4 per cent of the shares.

Just over 7 million shares are being placed at 170p, but indications suggest that they will go to a healthy premium even though the company is forecasting a loss of pounds 400,000 for the first half.

'You did not need to be a brain surgeon to realise the commercial potential of this technology even 10 years ago,' Dr Waldern said. 'I have always been interested in technology, interested in business and interested in making money.'

He is selling just over 1 per cent of his shares to net pounds 525,000. He retains about 10.4 per cent of Virtuality and another 5 per cent is held by the other directors.

Apax, the investment group, holds just over 50 per cent and each of the company's 70 workers in Leicester, where they work from an industrial estate in spartan premises, has a stake.

Of the quoted capital IBM, which financed some of Dr Waldern's early research, and Motorola have 6 per cent between them.

Virtuality concentrates almost exclusively on the entertainment market, producing the work stations and games software with exotic titles like Daktyl Nightmare and Total Destruction.

Companies such as Faberge and RJR Nabisco have asked Virtuality to develop games to help in advertising and promotion. And in Milan a hospital is experimenting in using the games for rehabilitation.

But the entertainment industry is where the money is to be made, and that market is in the US and Japan. In 1992 US consumers spent dollars 9bn on video games entertainment. In Japan it was dollars 7.8bn. Sega, the Japanese games giant, intends to open up to 50 hi-tech theme parks. Virtuality's contracts include an exclusive deal to develop VR games for Sega.

'Entertainment is driving the technology,' Dr Waldern said. 'The logic of this business is to stay ahead in the entertainment sector, stay aggressive in that market and utilise that technology by licensing it to other people.'

Fourth Wave, a market research company, estimates that video entertainment equipment sales to commercial operators will grow at 25 per cent a year, while in-home entertainment sales will increase at 60 per cent.

Dr Waldern said: 'The VR industry is at a very early stage in its development and this is reflected in the limited number of commercial users that have adopted the technology to date.'

But he added: 'Things are moving so fast that where this company is today will be dwarfed by where it is in a few years' time.'

Virtuality's turnover last year was pounds 5.2m, but he could not say where that might be towards the end of the decade.

So far more than 350 Virtuality VR systems, with a total value of more than pounds 10m, have been sold. They go mainly to arcades or family entertainment centres such as theme parks. However, Dr Waldern believes that the real breakthrough could come as early as next year when VR technology looks set to move into the home.

'The units are becoming smaller and the technology more suitable for home use,' he said. 'I believe a good quality unit could be available for about dollars 500, within reach of many households.'

He eventually sees the VR industry linking up with telecommunications companies, which would enable people to play VR games across the globe. 'Just think about it. Someone in London could telephone a friend in Baltimore for a game of Flying Aces.'

Dr Waldern would not speak specifically about the new product being developed nor the clients he is working with. Virtuality is at the leading edge of VR technology and he refuses to give competitors the remotest idea of what his company is working on.

'Knowledge and information is everything in this business,' he said. 'We believe that we are the only company in the world which has itself developed many of the key technologies which enable it to sell its own fully integrated VR entertainment systems.'

However, he did say that Virtuality was developing an underwater game for Universal Studios' new theme park. The company is also working with IBM and Motorola, though he would not say on what.

He formed Virtuality in 1987 with three friends, who managed to beg and borrow pounds 10,000 to start. Initially they concentrated on developing three-dimensional graphics and by 1989, when they won the British Technology Group best new business award, they had come to the attention of Leading Leisure, which thought of developing the equipment for its entertainment outlets.

Leading Leisure bought 75 per cent of the company for pounds 750,000 and Dr Waldern set about improving the technology. 'We literally bought an underground bunker in an old mill and secretly worked away for two years,' he recalled.

'It may sound dramatic, but a lot of the technology we were working on was completely new and we hid ourselves away so as not to alert competitors.' They emerged from their bunker for a computer show in 1990, where their VR workstations took visitors by storm.

When Leading Leisure hit financial problems Wembley Group emerged as a backer, only to dispose of its shares to Apax shortly afterwards. Ownership, Dr Waldern said, is now secure and the pounds 9.4m being raised from the full stock market listing will be ploughed back into the company.

Virtuality organises its activities into three businesses - design and manufacture of VR systems, development of software and licensing the technology.

There are only two other companies, both in the US, working in the same area as Virtuality, though Dr Waldern said neither was a serious threat. Several others are producing VR systems for industrial and military use, though the cost of these units far exceeds the pounds 25,000 price tag for a Virtuality system.

'Although some of these manufacturers may have identified the leisure industry as a potential area for diversification, such plans may not be successful until their prices are significantly lowered,' Dr Waldern said.

For the moment, then, the City - so often accused of living in an unreal world - now has the opportunity to invest in part of it.

(Photograph omitted)