In its short life, Phorm has managed to create more controversy than should be possible for a company worth £40 million. Kent Ertugul, its founder, modestly promises to revolutionise online advertising through software that monitors where people surf.

Phorm has been investigated by the City of London Police, who decided that its technology did not warrant further investigation; it has won approval to operate after a separate inquiry by the Department for Business; and it has been forced to revise its privacy policies. It has allayed the official concerns, but Phorm's share price crashed, dot-com style, from £35 in February to 200p on Monday.

Working with the internet providers BT, Virgin Media and Carphone Warehouse, Phorm aims to show you advertisements that you want to watch based on the sites you visit online. Not everybody wants to be monitored, but after a 10,000-person trial, BT said this week that it would go ahead, on the proviso that its internet subscribers would be able to opt out. Phorm's shares rose accordingly, closing yesterday at 287p.

Mr Ertugul, a native of London who has an American accent, founded Phorm in 2004 with the help of Russian programmers whom he had recruited soon after the Cold War and who worked with him on a range of software businesses in the 1990s. His enthusiasm for Russia was such that he also ran MiGs Etc, a tour company “that put tourists in military jets”.

The softly spoken Mr Ertugul, a 20 per cent shareholder, is at pains to explain Phorm's approach to privacy. He said: “We sit in the middle, between the internet provider and the network, see what websites people visit, and if we think it is relevant to an advertiser, generate a tag — like cars or cameras — that remains associated with that person”. The key, he says, is that although Phorm's software may conclude that you are interested in buying a car after a visit to the Auto Trader website, “we do not store any of the reasoning”, meaning that Phorm maintains no repository of where you have gone.

He said: “Even if somebody comes and demands we give up information about where people have visited, we can't tell them, because we don't keep it.”

What Phorm does do is associate surfers with a bundle of tags, and when it runs into a participating advertiser, it will offer up a relevant advert. Those who are tagged with “car” might see Ford advert; those on the “camera” list will get a Canon clip instead. “We don't aim to show anybody more than one targeted advert a day,” Mr Ertugul said, although that may depend on how much time is spent online.

“What it means is that it could be worthwhile for somebody who runs a site on a subject like social policy to sell adverts, because the adverts will be relevant to the visitors and valuable to the advertisers,” he said. Phorm's income is intended to come from taking a cut from advertisers to use its system, with the bounty shared with its partner internet provider.

What all that is worth is anybody's guess. Landsbanki reckons that Phorm can generate £14.9 million turnover in 2009; Canaccord Adams suggests £60 million. However, Phorm's prospects of going global, which Canaccord's figure implies, have been hindered by a series of management changes.

Stephen Heyer, the previous chairman, a former Coca-Cola executive, lasted four months, and three other American executives left as the group has failed to get into the US. “We had a board of a Fortune 10 company, when we were AIM listed,” Mr Ertugul said, although there is talk that the entrepreneur is tough to work with. Hugo Drayton, the UK chief executive, stepped down yesterday, but will continue as an adviser.

It is far from clear that Phorm's concept will take off outside the UK, or that there is enough interest in its targeted advertising to make serious money. Trying to get ahead of Google is not easy.

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