Direct Investments

The Mercia Group Quarterly: Informed, Patient Capital

At Mercia, a listed investment business, we initially look at companies at start-up or university spin-out level, and then typically support them for a further seven to 15 years to investment exit. During this time, we take a hands-on and patient approach to accelerating their development into cash generative enterprises over the medium to long term within the technology sectors in which we have deep knowledge. We review our model and how this sits in the evolving venture industry later in this update.

This second quarter saw yet another productive period for us, including seven investments via our third party funds into a growing portfolio of early stage investments; two direct investments to build our position in our emerging stars; the raising of £6m to invest in new and existing companies within MFM to develop our next generation of potential emerging stars; two more university partnerships with the University of Strathclyde and Abertay University; and the opening of our office in Edinburgh to build our presence across Scotland.

For more information on Mercia, you can also follow us on Twitter, LinkedIn, Google+ and now Medium 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 is centred on our own differentiatied proposition, Mercia's Complete Capital solutionwhich was developed prior to listing on AIM last December, resulting in the overlap of four key areas of focus for Mercia.

As momentum builds, a lot has been achieved over the second quarter of this year:

  1. £6m of third party early stage and development capital. With the Mercia Growth Fund 4 and University Growth Fund (a hybrid Enterprise Investment Scheme (EIS) and Seed EIS fund), this will provide investment capital over the 2015/2016 financial year in new and developing businesses within MFM, our pipeline for our direct investment strategy;
  2. 23 employees across the Group. As an organisation, we continue to expand, albeit at a controlled rate;
  3. 45 portfolio companies within MFM. The portfolio ranges in age from six months to eight years. Seven new investments were made via MFM this quarter – two of which were into university spinout businesses;
  4. 18 direct investments held by Mercia Technologies PLC. Two follow-on investments into existing direct investments made this quarter, building our position within these assets.

Mercia Fund Management

Our university partnerships

MFM links Mercia to deal flow sources, such as our 11 university partnerships, whilst also occupying 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 which are pre-identified by our investment directors. These investments are held initially by our third party funds, which act 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.

We are also pleased to announce two new partnerships with Abertay University and the University of Strathclyde in this quarter.

Abertay University (opposite) is the leading UK University in research and development into the digital sector – a key sector for Mercia. As Mark Batho, Vice-Principal and Deputy Vice Chancellor, put it: “We’re delighted to establish this partnership with Mercia Technologies. Their evident track record and expertise in providing specialist input to university start-ups, particularly in the digital sector, will be valuable in encouraging and supporting the creativity and dynamism for which our students are known”.

The University of Strathclyde (below), which has key research strengths in advanced manufacturing, life sciences and electronics, is important in both its alignment with Mercia’s technology sector focus, and Mercia’s commitment to expansion in Scotland. Commenting on the new partnership, Stuart Mackenzie, Commercialisation Infrastructure Manager at the University of Strathclyde, said: “The University is delighted to have added Mercia Technologies to our list of preferred investment partners. We have been impressed by Mercia’s success in raising new funds in a difficult market, and by Mercia’s commitment to expanding its geographic footprint.”

Building a pipeline of the next generation of emerging stars

University spinouts account for approximately 50% of the MFM portfolio, further emphasising the importance of our university partnerships. Such investments made by MFM in this quarter include:

  • InoCardia (Coventry University), a life science provider developing innovative models for evaluating the cardio-toxicity of new compounds under development;
  • Aston Eyetech (Aston University), a spinout commercialising a developed and sophisticated software product for accurately diagnosing and assessing certain eye diseases;

In addition to the above, investment was provided to the following businesses which are not university spin-outs:

  • wayve (digital), a start-up with growing revenue, which has developed a software platform that allows third parties to more easily convert static advertising assets into responsive web based adverts viewable on any device, and to track the engagement generated by these adverts in real time;
  • Customer Clever (software) is a pioneering facial recognition algorithm that can determine the gender, ethnicity, age and time of visit of a customer, allowing companies to gather accurate information on the demographic make-up of existing and potential new customers;
  • Love Me Beauty (digital, e-commerce), an online beauty product distribution platform with growing revenue;
  • Trink (digital), a novel business set-up which is working with Mercia in digital media and social sharing (more to follow!);
  • Intelligent Health (life sciences, digital health), a start-up combatting inactivity which operates many programmes nationally and is now expanding overseas with digitally connected initiatives such as “Beat the Street”, in which each participant receives a fob that they touch against “Beat Boxes” located along their journey.

Mercia Technologies PLC

In 2014, £2.7 bn was invested across the South East of England in venture capital against less than £300m across all of Scotland. This is not due to a lack of investible propositions, but rather a locality of investment capital to the South East. Mercia intends to take advantage of a growing pool of high quality investment propositions across the North and Scotland.

As part of this expansion, Paul Devlin (opposite) has joined us as Investment Manager Scotland to head up our newly opened office in Edinburgh alongside two other Mercia employees. Paul has a strong track record as an entrepreneur and supporter of early stage businesses and commented that: “This is a fantastic opportunity to help scale up Scotland’s existing start-ups and support the next breakthrough ideas. Mercia is well placed to support this, both through participating at later Series A investment, and also through its award winning SEIS and EIS investment funds”.

Direct investment activity

Approximately 50% of the portfolio of direct investments held by Mercia Technologies PLC are university spinouts. Over the period since 31st July 2015, we have also completed the following investments across our core technology sectors, enabling us to build promising businesses with strong growth potential:

  • Digital entertainment: A follow-on investment into VirtTrade, a virtual trading card platform partnered with Panini;
  • Software: A follow-on investment into Crowd Reactive, a rapidly expanding interactive social media, which brings together social media feeds from providers including Twitter, Instagram, Vine and Yammer at major events;
  • Telecoms: A potentially highly disruptive business addressing the challenges of the use of multiple antennae in mobile devices: Smart Antenna Technologies (a University of Birmingham spinout).

All of the above are emerging stars from the MFM portfolio. The direct
investments continue to grow at an impressive rate. As an example, our photo opposite shows the launch event for The Assembly, a new Virtual Reality game from nDreams which was debuted to the public at EGX in Birmingham on Tuesday 24th September. Approximately 2,000 people played the game during the conference, with over an hour wait to have a go! Do have a look at the YouTube video.

Here at Mercia

I was honoured to be awarded one of the national awards from Ernst & Young
for Entrepreneur of the Year 2015, but more importantly Mercia Technologies PLC was recognised at the Growth Investor Awards (2015) by winning “Industry Game Changer” for our established hybrid model of third party funding for our younger portfolio of technology companies, followed by our direct investment to scale our emerging stars.

And within the team, a big congratulations goes out to Mike Hayes for his recent marriage to Liz!

Industry trends

Traditional fund managers in venture seek 10-30x returns to account for portfolio failure and lengthy timelines to exit. Recent historic data demonstrates that, in order to achieve a 10x (from first investment to exit) it takes on average 12 years rising to 18 years for 30x returns. Furthermore, and excluding multiples on return, this data can be summarised thus when looking at the US venture scene: from investment to exit it takes a founding shareholder on average 16 years to see a return; from seed and early stage investment on average it takes 14 years; and a typical VC investment takes on average eight years. With the traditional fund investing for the first six years and harvesting in the next four, they will clearly be selling short!

Mercia Technologies PLC is a listed investment Business (breaking the mould of the traditional fund manager) that benefits from our wholly-owned third party fund management business, Mercia Fund Management (MFM).

MFM provides us with the opportunity to support spinouts from our growing number of university partnerships, as well as start-up businesses sourced through our partner accelerators, or the personal networks of our Investment Directors.

Through our Complete Capital Solution, we support the early journey of these businesses through MFM over a three to eight year period before they transition across as direct investments – at this point we expect to hold these investments for a further three to seven years, giving a total of six to 15 years from first investment to exit across the Mercia Group. This model thus provides an informed and patient approach as we look to build highly valuable direct investment assets, and fits exactly with industry observations in venture outlined above.

A report further emphasising the earlier observations by Mercia and others was published in the FT on the 1st November 2015 by European Technology Correspondent Murad Ahmed, in which he highlights the importance of a patient approach using data published by Draper Esprit (opposite). Esprit, a private traditional venture capital fund manager, recently commented on the positive approaches practised by this new asset class of listed investment businesses, which highlights the improved returns associated with building a holding over extended periods (typically in excess of ten years).

Looking forward

Mercia Technologies benefits from a portfolio within MFM that has received over £20m investment over the last ten years to build out our next generation of emerging stars – a number already transitioning across as direct investments. This, together with available investment capital raised on AIM in December 2014 to execute our direct investment strategy and a team with deep sector experience, bodes well for the remainder of 2015 for both Mercia and our portfolio of companies.

Our focus during the current quarter builds on last quarter’s one of ‘Ambition’ and relates to our consistent mantra of ‘Informed, Patient Capital’ as we look to scale our model across 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.

To download a PDF copy of The Mercia Group Quarterly, click here.