Mercia EIS Funds

Investing in gaming start-ups

By Mike Hayes- Head of digital

The gaming sector is a dynamic and fast growing sector – in 2013 the market was worth £2.7 billion in the UK, (excluding hardware sales), and is expected to grow to £4 billion by 2016. At Mercia we want to be at the heart of investing in UK gaming start-ups.

In the past five years, we’ve seen how the games industry has undergone a seismic transition.

For 30 years the industry produced either console/handheld games under licence from a specific platform holder, e.g. Nintendo, Sega, Sony, Microsoft etc. or PC games. Combined these consistently represented over 95% of game experiences.

Since the introduction of smart phone platforms, improved broadband connectivity and also the consumer adoption of low end social games the market has changed.

Traditional console and high end PC games, (physical media), typically rely heavily on sequels and massive production and marketing budgets ($25 million+), meaning new entrants can be locked out of the market, particularly at the lower investment end of the business. (There have been very few notable new publisher entrants into this market sector in the past five years).

Since the late noughties however the games market has been opened up in a way we’ve never seen before. Whether it is smart phone game apps, social games, gambling apps, lower end but highly addictive PC games, serious game applications, game platforms etc. the development environment has never been more vibrant or accessible.

By 2016 over 40% of all games played, (by revenue), will be via digital platforms such as Steam for PC, Live for Microsoft, PSN for PlayStation and so on. A staggering 20% of gaming revenue will be generated by mobile apps.

As traditional developers and publishers close, many new innovative small developers have begun to spring up and create a vibrant development community using the new open development and distribution platforms. These new developers are appearing regularly as the cost of entry is small, and the prizes are huge. And the UK remains one of the most creative and innovative countries for game and game associated development with world-class game engineers.

For many new developers and publishers looking to break into the market, it’s not just funding that presents a problem – management know-how to take their company to the next level and sector expertise can be critical. Many start-ups rely on family and friends, angels and regional grants and while these are of course valuable sources of funding, the sector expertise can be limited.

At Mercia, we believe that we’re different. Our investment team has a wealth of expertise in this specific sector – so we are able to offer in-depth understanding of not just funding but also the barriers that interactive, digital gaming businesses have to overcome.

We have a burgeoning gaming portfolio – with six investments carried out to date in 2014. One of our portfolio, nDreams is well and truly cementing its position in the Virtual Reality space, and aims to have two titles available alongside the launch of the Gear VR head-mounted display (HMD), expected later this year.

Sample gaming deals have ranged from a £200,000 SEIS/EIS investment in character focussed mobile apps builder, No Yetis Allowed, to a £300,000 EIS investment in the UK-based independent studio behind the popular online multiplayer football management game, SoccerManager.com. Recently we have just closed a £200,000 SEIS/EIS round with Edge Case Games an exciting and innovative player in the PC market and the company behind “Strike Suit Zero”.

This is just the tip of the iceberg for our portfolio companies and investors – watch this space for the most exciting gaming start-ups.