Matthew Batchelor works with Mercia as a growth partner to help our portfolio businesses resolve challenges and accelerate growth. Drawing upon on his expertise as a CTO for businesses such as Thomson Reuters and FindMyPast, Matthew has worked with Mercia backed businesses; Pimberly as an adviser and Rockar Tech as interim CTO and then as an adviser.

We sat down with Matthew to discuss his career journey so far, how his values inform his actions and why success is its own reward.

What prompted you to transition from a full time CTO career to working as an independent adviser?

After 20 years in technology, I set up Integrity Partners to leverage my experience to support a wide variety of businesses in a variety of sectors. As an employed CTO I’d go into businesses to support their scale up and fix technology challenges. But I was very mindful of the fact that, as a CTO, I was one of the most expensive people within the business and I felt that as soon as I’d fixed a particular problem, that my value within the business was diminished. I knew that I wanted to work with multiple businesses at the same time and see the synergies.

When are you brought into a company?

I get brought into a business when there is a need for a solution, whether this is around scaling the business or at certain pivot or inflection points. Within this context, success is achieved by focusing on people, process, platform and product. And invariably because my approach is empathy-led, typically the solutions can be found within the businesses themselves.

This approach proves to be very effective because change can be delivered in such a way that the integrity of the business organisational structure can be maintained yet often people are better empowered to lift their performances. In the event that this is not possible, a sympathetic team redesign that recognises someone’s contribution and strengths can be equally successful retaining key skills within the business.

What do you find rewarding?

I find it most rewarding to find people-centric solutions that will help a business to scale and then see the result of what I’ve achieved after I leave the business. I also really appreciate mentoring and staying in touch with the smart people who have created those businesses. I can see how they are getting on, and then help them when they grow into other businesses. I’ll keep that network to see where they are up to or actually help them with the next stage of their career.

My son’s favourite film is Nanny McPhee, so I’ve seen it a lot on Sundays, and one day the penny just dropped: I’m like Nanny McPhee. “When you need me, but don’t want me, I must stay. But when you want me, but don’t need me, I must go.”

You mentor business leaders and students at the University of Birmingham. What do you enjoy and find comparable about mentoring students and business leaders?

One of the most rewarding things I see, when working with a student or a CTO, is that ‘Aha!’ moment when the penny drops. Then, when my mentee puts that into practice, which could be in a lecture or a board meeting, and they receive positive feedback and are happy and really enthusiastic about the advice I gave, I relish it – it’s the reason why I do what I do.

I went to the University of Birmingham and it was important to me that I gave back. I would have loved to have met someone similar to me as a student to answer the questions I had about what my career should look like, entry avenues to different professions, and those type of things. I get to offer something that I wish I could have had.

Why did you decide to work with Mercia?

In my experience, there are two types of funds. The ones that I like to work with tend to  listen to their portfolio, they work with them and they want them to succeed.  Mercia are my kind of people; they are empathetic. They believe in their portfolio and work with them, not against them.

What are your core values and what values do you look for in the companies you work with?

I named my business Integrity Partners because integrity is at the core of everything I do. I value people who, when they say they are going to do something, they follow up on it; I value those who are very open, honest and transparent. And they don’t view people as rows on a spreadsheet but as individuals. Diversity is also really important to me.

What would you define as a key challenge in technology-led businesses?

Often, CTOs don’t have a seat at the boardroom table yet in many instances they are 50% of the business. Not having board exposure to the CTO is incredibly limiting for growth, especially for a technology-led business. They are intrinsic to the success of a business from start-up through the scaling process. And if they are not able to fulfil this role as the business scales, then there are effective ways of retaining this IP and expertise in the business that is a win-win for the CTO and the business.

 

 

Former HR Director Natasha Wallace supports teams and leaders to optimise performance without compromising on wellbeing. Her business, the Conscious Leadership Company, seeks to help leaders to thrive in their roles using technology to continuously allow leaders to reflect and track how they feel so they can transform their leadership style.

“Leaders who want to create exceptional teams must cultivate a conscious leadership style”

Recently in conversation Natasha she shared her thoughts on how to be a conscious leader – we’ve paraphrased these five tenets and we’ll also be sharing an insightful podcast next month with Lisa Ward and Natasha, during which they delve deeper into the topic of psychological safety in the workplace.

1) Psychological safety in the workplace

Psychologically safe environments are those where employees can challenge their leaders. Google’s ‘Project Aristotle’ study on team performance found that no other aspect of a team – its diversity, skills, capability – were as indicative of strong performance as trust and safety. The ability for employees to tell the truth without risk is integral to high-performance teams.  If you want to read how to create a workplace that engenders colleagues to achieve their full potential in an environment that also empowers innovation we would point you to Amy Edmondson ‘A Fearless Organisation”.

2) Establish a clear vision

Create a vision of your organisation that goes beyond profit objectives and creates roles that support its delivery. A disconnect between vision and the lived experience of employees day-to-day results in disengagement. Disenfranchised employees who feel like they can’t positively influence their organisation don’t perform as well as engaged employees working toward a purpose.

3) Cultivate resilience

It’s well-known that resilient workforces deliver higher performance over a long-term. However, leadership burnout doesn’t get much attention, but has a clear negative impact on organisational performance.

A recent Deloitte Report stated that 82% of leaders are exhausted, 68% of leaders are stressed by their workload, and 62% of leaders want to provide better wellbeing support to their employees. When leaders cultivate their own resilience by developing a conscious leadership style, the whole team benefits.

4) Fail fearlessly

Organisations should help their leaders to foster resilience by creating safe environments in which to fail. Leaders in safe environments have the autonomy to try new ideas and make mistakes in the process. Allowing time for exploration means that the infectious and positive values of creativity, innovation, motivation and excitement are fostered throughout the organisation.

5) Develop self-awareness

Self-aware leaders are strong leaders. Natasha recounted her earlier career as a HR Director and how she pushed her team to perform to the best of their ability without creating a safe space for people to self-express authentically. As a result, herself and her team suffered burnout.

Leaders who understand their strengths and weakness are more adaptive and flexible when faced with challenges. They understand when to step-up and when to withdraw, and as a result, feelings of autonomy within teams increase and overall organisational performance improves.

Nigel Owens, Mercia Portfolio Director; Sarah Williams, Mercia General Counsel and Company Secretary; and serial non-executive Frank Collins, sat down to discuss exits to trade or secondary buyouts. With a combined 59 years of exit expertise, our panel advised our guests at our Chair Summit 2022 on how businesses can best prepare for exit.

Prepare for an exit, but do not presume when or how it will happen. This was the pivotal comment of the day, drawing consensus from our panel that exits rarely arrive in an anticipated form; buyers often emerge from left field and timings take you by surprise.

Drawing further inspiration from this fireside chat we share these insights for you.

Run it like you will never sell

This is a bold statement, but one intended to narrow the focus of business leaders on creating value. The strategic plan for growth should run parallel to the exit strategy.

Our panellists’ advice to management teams was to run their business like they will never sell it and as though they will have an interesting approach tomorrow. Negotiating the tension between these two opposing imperatives is tricky but necessary as the buyer might not want to buy when management want to sell. However, business leaders should be adaptive and ready to sell if an offer is made that meets the objectives of everyone involved.

Consider your exit from day dot

Business leaders should start to consider the exit the day their first investment completes. Because good exits come from businesses that are run as though they will never be sold, understanding the value drivers for the business from the outset will help to refine the business plan.

Leaders must rise to the challenge and knuckle down during the period of frenzied activity that the first investment heralds and gain a clear understanding of what those value drivers are. They could be revenue, revenue growth, profitability, profitability growth, the technology, the people, or a combination of all and more. Understanding those value drivers and how they develop over time is key to all leaders.

Retain a focus on performance

Know what good performance looks like in your business and meet it. Hitting your numbers is important because regular underperformance knocks confidence in buyers. Those numbers do not have to be profitable numbers, but your business plan must be a meaningful document that has reachable targets. Buyers will look at it.

Maintaining accurate records is critical. You should maintain your data room following completion of your first investment. The unexpected is what derails most deals, but accurate record keeping saves you from trying to plug unexpected gaps during the due diligence process. Identify and highlight potential issues as they occur so you are not struggling to amend the unfixable when it is too late. A lack of preparation, poor record keeping, weak governance and data gaps are the chief factors that repel buyers.

There is no such thing as the right buyer

The perfect buyer is rarely the purchaser. The best most businesses can hope for is the best buyer at the right time.

Buyers often come from an unexpected direction at an inopportune time. Your potential buyer may perceive your business’ value in an area that you did not anticipate at the outset. To anticipate this, business leaders should retain an open mind about what are the value drivers of their business are. Buyers might see your business as an add-on to one in their portfolio, a means of accessing a new market or a method to acquire some new IP. Once you refine your buyer pool, you may need to tweak the message about what the respective value drivers are in your business to suit the interest of potential buyers.

What makes a bad deal?

Bad deals were those which lack honest conversations. Adversarial deals rarely lead to successful exits. Corporate transactions should have both sides of the table working in tandem toward the same objective. Everyone naturally wants their unique objectives to be met and their position protected, but open dialogues are necessary for deals to make it over the line.

Have clear expectations

Many deals fall away because stakeholders lack clear expectations of price on exit. Management teams could initially be excited by a headline number, but once tax bills are calculated and everyone realises how much they will take home, sometimes that number no longer works. To avoid this, management teams should know what numbers will cover the related tax costs and be remunerative enough for everyone involved to accept before sitting down at the table.

Be conscious of personality fit

Personality fit is integral to constructing successful management teams and is an equally important aspect of choosing the partners that the business works with during the exit process. Not everyone has the right skills to maximise shareholder value on exit.

Non-executive directors need to have the tough conversations about whether the management team has the right skills, capability and desire to deliver what will be expected of them when exit comes.

Good Chairs can provide appropriate, respectful feedback to the team about which personalities will best lead a business to a remunerative exit and beyond. A strong Chair can build teams that not only deliver exits but propel growth in the business’ next chapter.

As an exit approaches businesses will work very closely with and depend on their advisors. Choosing the right advisor can make all the difference toward as whether there is smooth exit process and outcome, or not. All advisors should be cautious, but uncommercial advisors can jeopardise transactions. Successful advisors are those who are neither excessively cautious or heedless but can draw on their expertise and resilience to negotiate for the best possible exits.

Loyalty matters less than suitability in the run up to exit. You may trust your long-standing legal adviser, but management teams should elect advisors best suited to the task at hand, even if that means introducing new personalities to the business. This is especially beneficial for cross-border transactions, when someone who can negotiate different territories,’ cultural differences can smooth the process.

In conclusion

A successful chair or non-executive director can provide the appropriate insight and feedback to propel growth. They can draw on their expertise to support in team construction, by focusing on personality fit; establish good data collection and record keeping; and by creating a business plan which clearly details value drivers. Great chairs and non-executives not only are instrumental in driving the kind of value which delivers exits but are the architects of the growth that comes next.

Responsible investing is increasingly at the forefront of investors’ minds, and, while ESG provides the framework to support responsible investment, Mercia wanted to take this commitment further. Through a bespoke impact fund, Mercia is actively creating a strategy to support businesses that seek to create positive change and societal benefit. With this approach, Mercia is striving to build on its heritage of significant investment in businesses that are providing solutions to global issues at a local level.

Having raised this first fund in only a few weeks, the Knowledge-intensive Impact Fund will invest in businesses that generate positive impact – that is, businesses that provide solutions to social or environmental challenges. Equally, our existing portfolio businesses, such as Faradion and The Native Antigen Company, a leading supplier of antigens for antibody testing kits, have proven that being purpose-led can amplify commercial outcomes.

Our early investment focus and track record in sectors such as Medical Diagnostics and Devices, Clean Technologies and Enabling Technologies have provided Mercia with experience and expertise in identifying, investing in and supporting businesses that are effecting change and that are driven by purpose. With careful selection and hands-on management these businesses can be high reward, as was witnessed in the realisation of a number of EIS portfolio businesses during 2021.

Mercia will measure prospective impact portfolio investees against three of the UNs’ sustainable development goals. We will assess whether prospective businesses:

  • support sustainable economic growth
  • reduce inequality in our communities
  • promote health and wellbeing for all.

Through this specialist EIS fund, investors will contribute solutions to societal challenges as they benefit from strong returns and realise further tax advantages of knowledge-intensive impact investment. The three main tax advantages of this Fund are:

  1. Income tax relief. Claim up to 30% income tax relief on EIS investments in the tax year the fund closes or carry back the reliefs to the previous tax year 2020/2021
  2. Capital gains tax deferral. Defer capital gains for up to three years before and one year after each underlying investment. Investors can even defer the gain if they have already paid the tax
  3. Inheritance tax relief. The fund’s investments provide 100% relief from inheritance tax.

This fund will also help investors simplify their tax planning. By April 2023, Mercia will have deployed this Fund and invested in eight to 12 impactful businesses.

We were inspired to create this Fund because our goal as an asset manager is to be a sustainable, ever-evolving business that remains focused on our vision to be the first choice for investors, investees and employees. Impact investing provides our investors with an investment vehicle that is assessable, while also providing them with the opportunity to effect positive change that will benefit UK regions by providing funding to purpose-led SMEs that draw on local talent to provide solutions to pervasive challenges.

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Sheffield Steel remains the international benchmark for quality, and South Yorkshire owes much of its pre-eminence as a metal manufacturing hub to its geology: iron ore and coal were mined from the hills surrounding the city, and nearby quarries provided the sandstone that allowed grindstones to sharpen blades. At the outset of the industrial revolution, Sheffield’s five rivers were perfect for the water-powered grinding mills, and the conurbation known today as the South Yorkshire Region is now witness to a new manufacturing renaissance.

South Yorkshire metal working can still be classified into its historic forms. There are manufacturers who produce light metals, like cutlery and edge tools, and those who work in heavy metals, including steel and armaments. Some, such as relatively new Mercia investee Tinsley Bridge, do both.

Tinsley Bridge’s manufacturing work has a pleasant symmetry, as they produce both kinds of metal that Sheffield is historically known for and provide a link between the region’s past and its future. The Group was a spin-off of British Steel in 1987, and today it occupies premises in Sheffield’s historic industrial corridor, where over 200 staff are employed. Tinsley Bridge is best known for its work in the automotive industry; its engineers invented the parabolic leaf spring, now used in over 80% of all truck suspensions worldwide. In addition to serving the automotive sector, Tinsley Bridge draws on its 150 years of expertise to provide engineering solutions to the energy, steel, nuclear, defence and rail industries. It also makes knives!

While the entire world watched the Deepwater Horizon oil spill of 2010, the American engineers working to combat the environmental disaster realised that only Tyzack shear blades – manufactured by Tinsley Bridge – were suitable to cut the riser pipe that connected the rig to the seabed.

Cutlery – knives, shears, scythes – has always been a serious business in Sheffield. The Company of Cutlers in Hallamshire was established in the 17th century to promote the standards and quality of Sheffield manufactured steel products. It is still in existence today; Rachel Abbott, the managing director of Mercia’s investee company Cobra Sport International, is a Freeman of the Company. Cobra Sport International makes steel exhausts for performance vehicles, has experienced accelerated growth over the past four years and is now considered a leading manufacturer of performance sports exhausts.

The region experienced a prolonged period of decline and stagnation after the decline of the coal, steel and manufacturing sectors in the 1980s. This decline was partially due to the region’s historic dependence upon a small number of large-scale manufacturers. A consensus from local policy stakeholders to diversify the region’s economy in the late 1990s influenced the foundation of the Advanced Manufacturing Research Centre (AMRC) in 2001 at the site of a former coal mine in Rotherham. The AMRC was founded to apply the region’s traditional expertise in metallurgy and engineering to new materials; its first collaboration was with Boeing. Today, the AMRC partners with over 125 companies, including Boeing, Rolls Royce, BAE Systems and Airbus, as well as local SMEs.

Advanced manufacturing is a far cry from the rigidity and grind of a factory production line that we typically associate with conventional manufacturing. Instead of directly competing with manufacturers in countries with lower wages and lower overheads, advanced manufacturers in mature economies create value differently. They position themselves at the forefront of innovation in materials and engineering processes derived from research and require a highly skilled workforce.

Tribosonics, a business that received its first investment from Mercia in 2020, provides a strong example of how South Yorkshire businesses are using university research to create products with the potential for profound impact. Tribosonics designs and produces smart sensors that are attached to industrial equipment to monitor wear and tear. This data is then used to support its clients in the manufacturing, power generation and transport sectors to be more efficient and sustainable. Data visibility like this can also inform the development of more sustainable manufacturing equipment and parts. As friction, and the degradation it causes, accounts for 23% of all global energy use, Tribosonics’ technology has immense potential to reduce carbon emissions and create a positive environmental impact.

Following the early success of the AMRC, the Advanced Manufacturing Park (AMP) was founded nearby at Waverly in 2001, with businesses including Rolls Royce and McLaren establishing premises. Multinationals like these depend on a reliable local supply chain for operational efficiency and to meet customer demand. Their presence in the AMP means SMEs in the region can benefit by supplying local components for products sold internationally. Mercia’s investee Castings Technology International is one of these SMEs.

Castings Technology International has been based at the AMP since the Park’s foundation. In the subsequent decade, it became known as a leading international manufacturer of high-integrity metal castings and is a critical part of the supply chain servicing global multibillion-pound contracts. The investment Casting Technology International received was simultaneous with a management buyout from the University of Sheffield. This buyout was recognised at the Insider Sheffield City Region Awards as the Deal of the Year in 2021 for saving jobs, contributing to job creation and following in the legacy of the Sheffield Forgemaster’s deals of the 1990s.

The AMP area’s continuing dynamism resulted in the foundation of the Advanced Manufacturing Innovation District in 2015. This is a 2,000-acre area that encompasses the AMP and the AMRC. Innovation districts are epicentres of collaboration between university researchers and the private sector – additionally relevant to Mercia’s investing thesis that has seen a number of university spinouts realise exceptional success. Apart from the innovative businesses that were founded in these locations, these regions are also exciting places to live, study (at school or university level), work and play. In my role as a Governor for a Multi-Academy Trust in the region, I am already seeing the impact the district is having on local young people. When I grew up, many of my friends went down the pit or went into manufacturing. Then the coal mines went, the steel industry went and the area went through decades of underinvestment. Now local young people are living and being educated in what is one of the UK’s centres for cutting-edge science and technology, with continued growth and employment opportunities in sectors such as electronics, material innovation and renewable energy.

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Deep Tech is now a fashionable sector for investment. Since 2015, global investment in Deep Tech has increased 20% year-on-year[i]. This is not because the visionary ability of entrepreneurs has improved – there have always been big-picture thinkers – but the Deep Tech ecosystem around them has changed. Critical resources like financing, skilled workers and technology are more readily available to entrepreneurs to help them take their pioneering ideas to market.

The increase in investment in the sector indicates that market reception of Deep Tech businesses has changed. For a long time, investors in the UK and Europe were cautious of this high-risk sector. Deep Tech businesses usually need more time than commercial technology businesses to progress from an idea to a successful exit. Additionally, the space is inherently complex, as it often involves the intersection of multiple industry segments. An average Deep Tech business (if there is one) is one in which digital/software interacts with hardware, material or biological systems. It is fertile ground – the kind of sector in which a PhD chemist’s thesis can develop over time into a commercial product with a significantly positive environmental impact. Getting there requires researchers, a management team and investors with the talent to understand both the risks and rewards.

Deep Tech businesses are currently a small portion of start-ups, but the influence they have is outsized because they are solution focused. It is estimated that 97% of Deep Tech companies fulfil at least one of the UN’s 17 Sustainable Development Goals[ii]. Despite the sector’s ability to create an impact, Deep Tech businesses often struggle to get early and mid-stage funding. The funding problem is exacerbated by how much Deep Tech businesses need to spend to be successful; the reality is that a biotech company requires an average of six times more capital than a blockchain business to create an initial prototype[iii].

Libertine, a business that develops smart engines for automotive and distributive power generation set-ups, struggled to access funding before Mercia invested in 2017. The market was favouring battery technology as the solution to support electrification, but the team at Libertine had rightly assessed that it was not the optimal solution and would not work for every vehicle. For example, fitting purely electrical powertrains into long-haul vehicles requires large up-front costs and poses accessibility challenges, as charging infrastructure is still limited. Factors like this could deter hauliers from adopting zero-emissions technology.

The team at Libertine set out to solve these pain points to ultimately increase the uptake of net zero vehicles. Its solution was to invent and build a smart engine that would convert renewable and electric fuels into electrical efficiency. Mercia’s involvement helped reshape Libertine’s value proposition and attracted interest from solutions-minded individuals. However, it was still a challenge to access scale-up funding for Libertine – it seemed that the market still failed to fully appreciate the potential impact of Libertine’s technology as a crucial factor in the future decarbonisation of the automotive industry.

Mercia energetically responded to the challenge of funding Libertine. When we believed the time was right for capital markets funding, Libertine was listed on the London AIM market – and accessed the financial support it needed to scale. Libertine’s market capitalisation was c.£27million when it was first floated on AIM, and now it is c.£37million. Having successfully accessed the funding it needed, Libertine is now going through the productisation phase and working with Fortune 50 businesses to transform vehicle electrification.

As a specialist asset manager, Mercia has proven itself to be agile and adept at facilitating funding for early-stage businesses that provide solutions. Whilst this calculated risk-taking is more established in the US, a certain conservatism remains on this side of the Atlantic. Mercia took thoughtful risks in the Deep Tech space before it was fashionable – and is now seeing these investments bring rewards.

Faradion provides a fine example of how beneficial Deep Tech investment can be – for shareholders and the public. As a Mercia Investment Director, I cofounded the business alongside Chris Wright and Jerry Barker. Together, we foresaw the rush and need to access sustainable raw materials with a secure supply chain to address the growing hunger for more batteries with an alternative base material to lithium.

Lithium and cobalt are more notorious today for their negative environmental impact than they were in 2009, but the team believed – as emerging research was suggesting – that there was a better way to build batteries. Having previously evaluated around nine UK battery technology businesses in the UK and deciding not to invest because their IP was incremental, rather than a more fundamental change in subject matter, we began evaluating technologies and settled on sodium-ion, as sodium is abundantly available.

Mercia exited Faradion 11 years after its first investment. The £100million sale also brought £25million of new investment into Sheffield for Faradion’s next phase of growth, and it generated an internal rate of return of 72% for Mercia.

Deep Tech businesses address fundamental problems; aside from the clear benefits in terms of social impact, they provide a practical framework that helps businesses scale. The businesses are usually purpose-driven, and the operations, technology and sales functions are developed to be optimised to fulfil this purpose. A purpose-driven mindset helps management teams develop efficient operational systems in singular pursuit of that purpose. As a result, Deep Tech businesses scale well, if they retain a clear, mission-led objective that drives their commercial operations.

Mercia has invested in the Deep Tech space for around 13 years, and it continues to use that heritage of expertise to support portfolio companies, such as Impression Technology, Mindtrace, Uniphy, Warwick Acoustics and Logically, as they grow. Logically is an early-stage tech start-up that has, so far, had a very promising trajectory. Founder Lyric Jain created Logically after observing how influential the disinformation campaigns were during the 2016 Brexit and US election campaigns. It developed a powerful artificial intelligence engine that classifies content into 14 categories of biases to identify disinformation, with a human-in-the-loop to ensure veracity. Logically recently raised £14.3million in investments from Vitruvian Partners and Amazon to complete its product development, scale and expand. It is currently working with governments around the world to identify disinformation campaigns and nullify their threat to democracy.

When others were still reluctant to invest in the sector, Mercia was busy helping to build management teams and create value. Today Mercia can look back on its legacy of Deep Tech investments and confirm that it has generated results. Businesses such as Libertine, Blue Prism and Faradion were carried from early-stage to international recognition. This is testament to the skill that Mercia has in supporting businesses to scale – primarily due to its supportive approach.

Another aspect of Mercia’s approach to value creation is the quality of talent it helps attract to start-ups, where typically that level of expertise would be out of their reach, as well as how deeply the management team understands the risks, value inflection points and effort needed to build global Deep Tech companies from idea to scale.

Today, Deep Tech companies in Europe have a combined worth of €700billion.[iv] It is anticipated that the future of the sector lies where user behaviours and societal data collected from multiple platforms will shape forthcoming technological inventions, whereas over the last decade or so, technological innovation has influenced or changed people’s behaviours and actions. Mercia envisions the Deep Tech businesses of the future as those where human biology and intelligent hardware intersect with intelligent software.

Mercia is proud to be one of the few UK investment houses that has over 13 years’ experience in the sector. While others considered the sector too challenging, Mercia was prepared to support the potential it saw in regional Deep Tech SMEs. It is that heritage of expertise that means Mercia is primed to support the Deep Tech start-ups of tomorrow.

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[i] A Deep Dive to Deep Tech Investing (bcg.com)

[ii] Deep Tech and the Great Wave of Innovation (bcg.com)

[iii] Deep Tech start-ups: Next wave of global disruptors? | Business | Economy and finance news from a German perspective | DW | 14.05.2019

[iv] EUST-Dealroom-Sifted-Deep-Tech-Jan-2021-1.pdf

 

 

History often informs our actions. Today, we see many similarities with the 1970s – high inflation, energy price hikes, climbing interest rates pushing up national debt and full employment – albeit conceivably temporary in nature. With indicators pointing towards a sharp economic levelling with the real possibility of a near-term recession, regardless of whether you recognise these as parallels in history or as new challenges, refreshed attitudes are needed.

The age we are living in is increasingly uncertain. Concepts we have considered foundational to our existence – like the widespread health of populations in mature economies or an era of peace in Europe – are no longer as assured. But what is certain is that Mercia will meet these challenges with a spirit of optimism, seeking clarity in a dynamic and rapidly changing environment. As a purpose-led organisation, we operate with a mindset of opportunities rather than challenges.

Mercia was founded with the intent of addressing the regional funding and investment support gap. When we began to address this funding disparity back in 2010, Mercia was a team of five working in one room in the Midlands. Today, we are a team of over 120 with eight regional offices around the UK, including our recently opened office in Bristol. I believe that our focus on solutions, instead of obstacles, has been pivotal to this successful growth.

This attitude is encapsulated in Mercia’s success in Deep Tech investments, particularly when others were reluctant to invest in the space.

Deep Tech businesses are often seen as capital-intensive early-stage concepts, notorious for taking a longer time to generate returns than conventional consumer-facing businesses. Mercia views these businesses through different eyes, recognising the role these regional SMEs have as ‘enabling technology’ businesses. We back innovators who look at capital-efficient ways to use existing base technologies to solve global problems. Last year, our exit from Faradion was a great showcase for this approach of combining patience with capital capability. Our successful sale of Faradion saw us pass the baton of this emerging business to Reliance Industries for a £100million, full-cash exit. Faradion focuses on using existing manufacturing capabilities and modified technologies to create a sodium-ion battery platform. The business continues to grow in the UK, now supported by its new owner. Libertine is also worth mentioning. After listing Libertine last year, it accessed the scale-up capital it needed to accelerate its growth as an innovative developer of smart engines for automotive and distributive power generation set-ups.

Excitingly, our Deep Tech pipeline remains strong. Many of these next-generation businesses are providing creative solutions to environmental challenges and supporting mature economies in their quest to achieve net zero.

Nova Pangaea in the Tees Valley is a promising portfolio company that is primed for international expansion. To help resolve the problem of crops, such as corn, being harvested for use in fuel, Nova Pangaea uses non-food plant residues to develop advanced biofuels and other chemical products.

Other portfolio businesses, such as Tribosonics and Slingshot Simulations, are applying scientific research to reduce the impact of waste on the environment. The smart sensors that Tribosonics develops help industries monitor the degradation of parts to support the development of more efficient and sustainable outcomes. Leeds-based Slingshot takes large, accumulated datasets that are currently neglected and transforms them into legible insights that are actionable in sectors including logistics and urban planning.

We are also encouraged by the progress of two Midlands-based businesses – Warwick Acoustics and Impression Technologies. Despite industries such as car manufacturing experiencing setbacks and delays during the pandemic, these companies have demonstrated remarkable resilience. As electric vehicles become more commonplace, Warwick Acoustic’s low power, superlight speakers are primed to help reduce power usage by reducing the weight of cars. Impression Technologies, with its highly scalable pressing technology, is enabling aluminium’s additional strength and lightweight advantages to be a solution to what will, no doubt, be a commonplace demand in vehicle manufacture.

Our approach to responsible investing is to provide the capital that will allow more purpose-led businesses to continue growing, so that SMEs can positively impact their communities, their regions and the people they serve.

Mark Payton

CEO, Mercia Asset Management PLC

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At one time, businesses had to prepare for the digital age. Now, the newest vanguard of technological development is the metaverse. In October 2021, Facebook CEO Mark Zuckerberg announced that the social media behemoth would be rebranded as Meta, indicating the company’s intention to dominate the emerging metaverse market. A metaverse is a Virtual Reality (VR) world, where users can interact with each other and share common experiences within a simulation. Like other Big Tech companies, Facebook has been pushing for widespread consumer adoption of VR technology since at least 2014, when it acquired the Oculus Rift VR headset. 

Although public uptake has so far been slow, steady investment in metaverse technology indicates that Big Tech still sees the area’s potential, and the coronavirus pandemic has accelerated consumer uptake. Gaming company Epic Games has long endorsed the metaverse idea and ran a successful proof of concept in April 2020 during the first wave of the pandemic. Travis Scott, arguably the most-popular rapper in the world at the time, held a virtual concert in the Fortnite game which the avatars of 12 million gamers attended. When Scott raised his arms in the air, gamers experienced their avatars take flight as they rose. 

Long before the Travis Scott concert, Fortnite was attracting attention for its unique financial model. The game itself is totally free, but players are encouraged to make in-game purchases on unique clothes, accessories and weapons, known as ‘skins’ for their avatars. Although it might sound strange to people who haven’t spent time in virtual worlds, Fortnite players have a strong sympathetic attachment to their avatars’ appearance and identity. As in a physical playground, there’s sneering at players who don’t adopt trends; during game play, avatars in the free outfits are derogatorily referred to as ‘no skins’. There are subcultures too – the ‘sweatiest’ skins (the coolest; those worn by the avatars who are considered the most skilful in-game) are those that were released during the first iteration of the game in 2018. Fortnite made Epic Games $5.1 billion in 2020 from in-app purchases of skins and promotions like the Scott concert. 

Perhaps perceiving it as a marketing opportunity and a chance to gain relevance with a new demographic, last year saw the first significant partnerships between fashion houses and gaming companies. Gucci collaborated with metaverse and gaming platform Roblox in May 2021, opening a virtual boutique where players could purchase Gucci clothes for their avatars to wear in-game. Although initially items were priced affordably, with a Dionysus bag costing only 475 Robux (or $5.50), its limited-edition nature meant the resale value in-game skyrocketed. In the end, the virtual Gucci Dionysus sold for 350,000 Robux, or $4,115 – which is more than the bag costs in the real world. This was followed by Balenciaga collaborating with Fortnite in September 2021. Branded hoodies sold for 1000 V Bucks, or $8.00, making them accessible to those who couldn’t wear the hoodie in real life.  

Fashion and gaming companies can both be considered early adopters of metaverse technology. Nike followed on from luxury brands in November 2021 when it filed seven patents for virtual-only clothing and apparel. In light of this, it is no stretch to say that the intersection of social media, gaming and retail is where consumers will be first exposed to the metaverse. However, despite all the excitement, the metaverse is still very much an emerging concept. At the minute, all virtual worlds are distinct from each other – we are currently in a world of metaverses, rather than a metaverse – and every world requires a different avatar. The Wall Street Journal reporter Joanna Stern described her experience of one day spent in the metaverse as one in which: “everything was fractured. I ended up creating four different avatars over the course of 24 hours.”  

Augmented reality (AR) is already a more widely-adopted technology which is reshaping the experience of media and retail for the masses right now. Spend five minutes scrolling on TikTok, and you will see innumerable human faces with their natural features distorted or enhanced by filters, which themselves are AR digital overlays onto the real world. It is not uncommon to virtually try on glasses while online shopping and this development is expected to extend to other kinds of apparel. Retail adoption of AR is a natural conclusion of the years following the pandemic, a time when many high-streets remain empty and some consumers are showing increased reticence to shop in-store. Giving consumers the ability to visualise products on themselves and in their homes will distinguish retailers at a time when there is growing consumer demand for this sort of technology.  

Business leaders outside of retail and gaming might not yet understand how metaverse technology could apply to them, but its potential is worth exploring now. The AR and VR market is anticipated to increase in value from $41.8billion in 2021 to $135.4billion in 2025, so it’s likely that other sectors will follow soon. An early-adopter outside of consumer retail, Big Tech and entertainment is BMW, which is currently constructing a ‘digital twin’ – a digital rendering of a physical asset or system – for its assembly factory on the metaverse platform Omniverse. BMW publicly stated that it believes this will ‘revolutionise’ BMW’s planning process in advance of constructing new vehicles at its factory site.  

Increased investment, alongside sustained excitement from Big Tech, demonstrates that metaverse technology is coming, and business should prepare for this next stage of digitisation. Future-proofing can be perceived as intimidating, but it is also invigorating, as new opportunities that were not previously available are emerging. BMW’s decision to increase efficiency with a digital twin of its factory provides a good benchmark for how business leaders can consider potential applications of metaverse technology. Other ways business leaders could use VR to enhance their businesses’ operations include implementing blockchain processes which combine simulations with audit trails to ensure legal and regulatory compliance. While virtual boards are not a new concept, board meetings held in VR or the metaverse are. This would help ameliorate any local talent shortages by allowing for meetings as dynamic and immediate in a virtual world as those held in-person, with board members located potentially thousands of miles away from each other.  

As corporate plans for the digital world increase, our computation power must too. Intel estimate that metaverse projects will eventually demand x1,000 the computing power we have now. Although this statistic is certainly intimidating, it provides an interesting jumping-off point for businesses in diverse sectors to consider how their work could be applied to this objective. For example, semi-conductor businesses will have to continuously advance their technology so this kind of traffic is possible and reliable. The opportunities the metaverse presents for businesses in widely different sectors is expansive.  

Adopting emerging technology like this can drive value in multiple areas. This can be from a sales and marketing perspective, or a talent attraction perspective. As is the case with retail, VR and AR has already been used to drive real-life sales. BMW is using this technology to drive operational efficiency, which sets a fine example for others in the manufacturing sector. In an era when talent shortages are increasingly challenging for many companies, presenting yourself as future-focused can be a strong cultural incentive to drive young talent to your business. Board members might prepare themselves for the next phase of digitisation by examining their businesses’ current operations and seeing how the metaverse concept might apply to them. With an entire new virtual world blossoming inside our reality, the possibilities for growth driven by metaverse technology are as limitless as our computational power and earthly resources will allow them to be.

Mercia sat down with experienced financial professional Daniella Wainwright to hear what her experience of working as portfolio/plural finance director in Yorkshire-based SMEs is really like.

Next month, Dani will be joining one of our portfolio companies Sock Monkey Studios as their part-time finance director. Ahead of that, Dani spoke to us about why pursuing a plural career across a diverse portfolio of businesses works well for her, and could work for other senior finance professionals.

“Working as a finance director for multiple businesses in different industries is not something many senior financial professionals are aware they can do, as opposed to working for one corporate. I want people to know that it’s a realistic, viable option for them, and they can make the change quickly and profitably!

“The ‘great resignation’ has made everyone consider how they can achieve a balanced lifestyle, creating time for the things in their life that bring them joy. As someone who put in a lot of hours in corporate roles over several years, I was very much a weekend mum. The plural FD life appealed to me as I could be more in control of my schedule. And I’ve met a lot of other parents, both men and women, who are interested in pursuing this route. It’s not only for parents, I know others who work this way because they want the flexibility of not to having to choose between their passions and a fulfilling, interesting finance career. I think it’s an excellent choice for any senior finance professional once they have built a solid track record that shows they have the experience and gravitas to make an impact, and quickly add value to businesses.

“When I had been considering a portfolio career, there was always one more bonus or LTIP incentive tying me in! [The decision] for me was being made redundant during the pandemic, this is what prompted me to take the leap and pursue working for myself. I onboarded my first client three months after being made redundant in October 2020. I worked hard to establish myself quickly and I found being true to my personality made marketing myself a little bit easier. I think its counterproductive sometimes to be too ‘professional’ when establishing a tone of voice or brand identity, as it can come across as a little bit stilted. I found by showing some of my personality, the clients who I wanted to work with approached or selected me. I think as a result of the COVID-19 lockdowns, and everyone having been denied the usual opportunities to make personal connections for so long, most management teams will respond more to the human element now.

“I’ve enjoyed being able to take on clients that align with my interests and values. The freedom to choose the type of clients I work with is something about the life of a plural FD that I find very appealing. It means I’m always working with businesses where my interest is piqued, and I am ethically comfortable. An enjoyable place to be for anyone. As an example, I had previous experience in a plc company that acquired seven marketing agencies with varying service offers, where I led the finance due diligence process, then became the interim FD for these newly acquired businesses. I really liked how lively the agency environment is, with their “work hard, play hard” culture, so I was very keen to have a client in the marketing space, which I now do. Another example, that is a bit left field, is my client in the energy space. When I was in charge of the property budget at Wm Morrison’s, part of that role was managing a huge energy budget. Energy is a really interesting, complicated industry and I learned so much in that role. Now, one of my clients generates much of their income from the solar farms that they own. This is a great fit for me as I have an interest in the industry, plus I like contributing to a business that is helping the transition to net zero. It’s important to me that I can get behind my clients’ intentions, impact and purpose.

“Another advantage of the plural FD life is working in different industries at the same time. Not only does it de-risk my portfolio; having experience in multiple industries is also beneficial to my clients as I’m able to cross-pollinate ideas. You can take ideas that you’ve seen work elsewhere and see if they could work for other companies in your portfolio .

“Working with ambitious SMEs is really rewarding. You can quickly have an impact on these types of businesses. There tends to be a lot less red tape and these businesses are really dynamic. When you have an idea to do something that will really improve their reporting, for example, you can just get it done, while in big corporate environments there are often layer upon layer of authorisations required in order to achieve your objectives. You can have a bigger, faster impact in SME environments, and the business owners are often really grateful for the work that you do.

“Many people ask me for an introductory chat to explore whether portfolio work would suit them. There is heightened interest, at the moment as people reassess their priorities post-COVID. However, us finance folk are naturally risk adverse! People can, in my experience, get stuck, as they don’t know how to go about making portfolio work their reality. To de-risk the journey for them, and to give them support to make this leap of faith, I have developed a course which covers everything I’ve learned over the last 18 months to show them how to make a quick and profitable transition. The course covers legal requirements and the business set up, but its more about how to sell what you do, how to market and network so you’re front of mind when opportunities come along. These areas do not always feel that comfortable to finance professionals, so it is a mindset shift, especially on the selling side. Once I was comfortable with this aspect I started to gain traction. I cover a range of how to make all of this feel more relaxed and authentic. I was inspired to put this course together because the only thing I really miss from the corporate world is mentoring and developing people. I think that being able to provide this support will give me so much in return, in terms of feelings of fulfilment and purpose”.

Mercia is committed to building a vibrant, engaging non-executive and board advisory network that has an enviable depth and breadth of skills and experience. Our driving passion is to make a real difference beyond the provision of capital, through both strategic and hands-on support to our portfolio companies.

We are continuously expanding our network of individuals across a range of sectors and geographies. Please contact Victoria Robson if you would like to explore working with Mercia as a portfolio finance director.

Our Portfolio Resourcing Team is dedicated to partnering sector and industry experts with Mercia portfolio companies.  

Successful investment is always built around a team and product, but an experienced non-executive working with the skill-sets of our portfolio businesses’ management teams enhances overall shareholder value.  

 

Here’s a roundup of the appointments made across the portfolio in the first quarter of 2022.  

 

  • Carl Barratt, Chair, Applied Monitoring: developing a non-invasive blood analysis testing device for the alcohol and drugs of abuse market. 
  • Neil Hayward, NED, Applied Monitoring. 
  • Andrew Anderson, Chair, Talion: provider of hybrid cyber-security services. 
  • Alan Peel, Chair, Impression Technologies: leader in light-weighting solutions for automotive, aerospace, and consumer product sectors. 
  • Matt Little, Chair, Melius Cyber: security and monitoring for the workplace. 
  • Martin Donnachie , Chair, UK Landscapes: a national specialist contractor providing environmental services.  
  • Kevin McDonnell, Chair, Intelligent Health: developer of digital health solutions to encourage communities to be more active; and ART Health Solutions: a provider of robust data insights to help organisations make better informed decisions relating to employee wellbeing and performance.
  • Andrew Doyle, Chair, 6 Bit Education: developing an AI powered assessment and feedback tool for the education sector. 
  • Tony Austwick, Board Advisor, 6 Bit Education Ltd.
  • Peter Harkness, Chair, Texere Publishing: innovative publishing company for the scientific, technical and medical markets. 
  • Ron Black, Chair, inVMA: developer of Kinektio, an IoT integration platform. 
  • Mark Hurley, Chair, e-bate: provider of intelligent rebate management solutions. 
  • Tim Hipperson, Chair, Adludio: developer of cutting-edge AI and proprietary creative tools for mobile brand solutions. 
  • Gordon Matthew, Chair, Coho: developer of a SaaS solution to deliver an effortless HMO management tool which makes self-managing an HMO easy.
  • Mike Evans, Chair, MIP Diagnostics: developing molecular imprinted polymers (MIPs) as a synthetic alternative to biological affinity reagents.
  • Michele Pedrocchi, NED, MIP Diagnostics.