By Thorold Barker

ESouk, the privately owned internet incubator fund, on Thursday axed almost three quarters of its staff in response to the volatility in technology stocks, which has made it difficult to float young internet companies in London.

The company will continue to invest its $10m fund in internet start-ups, but is understood to have decided that it could not justify the cost of 22 highly paid staff to help nurture its investments. It is cutting its staff to seven.

The move is the latest sign that internet incubators - which invest in start-up companies and provide advice and support during their early development - are preparing for harder times. Last month NewMedia Spark, one of the biggest quoted incubators in London, bought rival Softtechnet for £30m to boost its cash reserves.

ichael Whitaker, Spark chief executive, justified the deal on the grounds that Spark would inherit £23m of cash to reassure investors that it had a strong balance sheet in case the difficult times continued. It would also strengthen the company's management team.

Internet incubators are likely to need strong balance sheets because it is difficult to raise new money from investors, or from crystalising their investments. But they still have to fund a portfolio of loss-making companies and their office infrastructure.

It is understood that eSouk believes the internet incubator model is still valid for the bigger companies. But it decided it was too small to compete effectively and would do better with a more passive investment strategy, paying for specific external expertise when it was required.

One director at a rival incubator said: "It is important to be big so you can have different teams focusing on different areas. There is no way a small team can understand each area you can invest wisely."

ESouk was formed last year and invested in five companies between November and February. These included Uvine, the wine trading exchange, and NetImperative, the online technology news service, which ran into funding difficulties before being bought by Bright Station, the software and e-business company.

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