The Mercia Group Quarterly: Ambition

Our theme over the next period is AMBITION, both for Mercia and our innovative portfolio of technology companies, as we seek to accelerate their growth whilst scaling our own investment model.

Ambition is also a key attribute that we look for in the entrepreneurs we back and support, with a recent interview with Crowd Reactive CEO Dan Strang providing the perfect example of the dedication, hard work and vision we see in every company that we have funded and supported this year. Our complete capital solution means that we are able to not only understand the ambition of our entrepreneurs, but also work with them at every stage of their journey, from start-up / spinout through to development, expansion and scale.

Ambition resonates within Mercia too – since our appearance on AIM on 18th December 2014 at a share price of 50p, and as I write, we have closed at 60p, a 20% climb. Over the same period, the AIM all-share index has climbed circa 10%.

Through our regular quarterly updates, we will summarise the investments made by both arms of the Mercia model: Mercia Fund Management (MFM), our wholly-owned FCA-authorised fund management business; and Mercia Technologies PLC, our direct investment company that seeks to scale the ‘emerging stars’ from MFM. We will also discuss news across the Mercia Group, and industry trends from the exciting world of UK technology.

For more information on Mercia, you can also follow us on Twitter, LinkedIn and Google + for up-to-date news and views from myself and the Mercia team.

Mark Payton, Chief Executive Officer, @MPayton_Mercia

Reflection on the last quarter

The context for this update note is centred on our own differentiated proposition, resulting in the overlap of four key areas of focus for Mercia:

As momentum builds, much has been achieved over the last quarter:

  1. £5-6m of third party early stage and development capital. With the Mercia Growth Fund 4 (a hybrid Enterprise Investment Scheme (EIS) and Seed EIS fund), this will provide investment capital over the next 12 months in new and developing businesses within the MFM stable; our feeder to our direct investment strategy;
  2. 19 employees across the Group. As an organisation we continue to expand, albeit at a controlled rate;
  3. 45 portfolio companies within MFM. Six new investments were made via MFM this quarter, one into a new university spinout business taking the businesses held within MFM to 45; and
  4. 18 direct investments held by Mercia Technologies PLC. Four new direct investments made (all into new emerging stars) this quarter, building our direct investments to 18 portfolio companies, from 11 when we listed last year and from 14 to our 31st March 2015 year end).

Our investment model, the ‘Complete Capital Solution’:

Mercia Fund Management

Mercia Fund Management (MFM) links Mercia to deal flow sources, such as our nine university partnerships, and occupies the ‘post-seed’ and onwards space. We look for investments across our four technology sectors: digital

entertainment; software, electronics and hardware; advanced materials, engineering and specialist manufacturing; and life sciences, matched against subsectors pre-identified by our investment directors.

Our objective? To accelerate the portfolio company’s commercial offering by building out the board, management, the product offering and business model, with a key internal metric being revenue growth.

These investments are held by our third party funds, which acts as the vehicle by which we nurture and grow the promising emerging stars of the future, which can then be channelled into our direct investment strategy.

In the last 12 months we have made 22 investments within MFM, 11 into new businesses adding to the growing MFM portfolio of companies. University spinouts account for approximately 50% of the MFM portfolio, further emphasising the importance of our university partnerships. Since 31st March 2015, three of the six investments made by MFM were into university spinout companies, including a new addition to the portfolio:

  • Nuvision Biotherapies Ltd (University of Nottingham), a Life Sciences and medtech business developing specialist eye care for surgeons and veterinaries;
  • Irresistible Materials (University of Birmingham), an advanced materials business developing photo resist material for the semi-conductor industry;
  • and CYP Design (De Montfort University), a Life Sciences business focused on providing services and partnering with third parties to use in their drug discovery programmes.

In addition to these, further support was provided to some long-standing investments at Mercia:

  • Oxford Genetics, a Life Sciences business providing bespoke molecular biology reagents and services;
  • Thalia Design Automation, an electronics company specialising in Electronic Design Automation (EDA) tools for optimising analogue and power electronic circuits;
  • Canary Care, an electronics company that has developed a wireless and easy to set up monitoring device to ensure that the elderly can maintain their independence without an invasion of their privacy.

All of our current third party funds provide support to businesses like these. The table below represents the third party funds’ performance:

Direct investment activity

Approximately 50% of the portfolio of direct investments held by Mercia Technologies PLC are university spinouts. Over the period since 31st March 2015, we have also completed on the following investments. These are spread across the four technology sectors in which we hold deep internal expertise, enabling us to build promising businesses with strong growth potential:

  • Digital Entertainment. A £0.75m investment (of a £1.5m commitment) into the gaming company Edge Case Games. Their game, Fractured Space, offers a 3D gaming experience with the potential to be highly disruptive in the target markets of Europe, the US and China;
  • Specialist Manufacturing. A £0.75m (of a £1.5m commitment) investment into the novel aluminium pressing business Impression Technologies, a University of Birmingham spinout;
  • Electronics. A £0.75m (of a £1m commitment) investment into LM Technologies, a profitable wireless and Bluetooth electronics integrator;
  • Life Sciences. A syndicate investment into Psioxus, a University of Birmingham spinout, as part of a £25m round.

All of the above are emerging stars from the MFM portfolio.

In the news

Although outside of our focus, both in terms of sector and geography, it is interesting to note that there is a growing pool of investment becoming available to life sciences in the drug discovery and drug development sectors, particularly around the “Golden Triangle” of London, Oxford and Cambridge.

This can be seen by the recent funds that have opened in those areas, including the £320m University of Oxford fund – Oxford Sciences Innovation plc, Cambridge’s equivalent, the Cambridge Innovation Capital (circa £50m), and the Wellcome Trust’s Syncona fund (£200m). This is great news for those early stage companies that in the past have struggled to raise the capital necessary to advance their research and clinical programmes.

Investment trends

With 74% of digital technology businesses based outside of London, the digital and internet economy is classed as the second largest contributor to the UK economy, forecast to contribute £180bn or 10% of the country’s GDP for 2015. Furthermore, the UK is seen as the hotbed of development and an important source of early adopters, leading any other G20 country.

At Mercia, we are beginning to reap the rewards of having digital as one of our core investment sectors. Early on, we identified Virtual Reality (VR) as a potentially disruptive opportunity, hence why it has become a sub sector within our Digital Entertainment category. On that basis, we have supported the games and experiences software developer nDreams as it recently transitioned from MFM to become a direct investment.

VR is forecast to be a $30bn market by 2020, with many big names such as Samsung (VR Gear), Sony (Morpheus), HTC (HTC-Vive) and Facebook (Oculus Rift) looking set to bring hardware sets at affordable prices to the market from late autumn this year through to summer 2016.

With gaming seen as an early adopter of new digital technologies, we believe nDreams is well placed as it works on supplying games and experiences through a majority of the VR platforms coming to market. The CEO of nDreams, Patrick O’Luanaigh, is particularly optimistic about the future as he tells us in an interview for Mercia’s Insights here.

Looking forward

Mercia Technologies benefits from a portfolio within MFM that has received circa £19m investment over the last ten years to build our next generation of emerging stars. This, together with available investment capital of in excess of £50m to execute our direct investment strategy and a team with deep sector experience, bodes well for 2015 for both Mercia and our portfolio of companies.

Our focus remains that of ambition – building out the management and board of our emerging stars, and scaling our own model of the ‘complete capital solution’ nationally, with a push across the Midlands, the North and into Scotland.

For more information, you can visit the Mercia Technologies and Mercia Fund Management websites. We also have a brand new Insights section, with regular updates from leading entrepreneurs from within our portfolio of companies.