Direct Investments

Looking forward: Our first month as a PLC

It’s now been just over a month since we listed Mercia Technologies on AIM on the London Stock Exchange and raised £70m. Following more than seven years of developing our model, and just one month into our journey as a PLC, Mercia now finds itself with nine university partnerships, a portfolio of some 38 companies and growing under MFM and now 12 exciting and growing emerging stars that have benefitted from our direct investment in their business.

So why Mercia?

We have the team, ambition, capital and resources to address the challenge of matching appropriate capital to exciting technology-backed businesses across the UK, and our name reflects our heritage of developing businesses in the Midlands, and now the North of England and Scotland. We are proactive in our search for investment prospects across our 9 universities and a multitude of accelerators and incubators.

Why list Mercia on the London Stock Exchange?

We have a list of supportive long term investors who recognise the growth potential within Mercia and the sector that we now sit in. As a publicly listed company we provide the transparency and governance sought by such high quality shareholders.

Why £70m?

This capital provides us the opportunity to rapidly scale a select number of emerging stars within our portfolio of companies, whilst also scaling our own business and expanding our growth potential.

It has been our belief for some time that the traditional 10 year fund structure associated with venture capital fails to work when seeking to back and grow technology businesses – a commonly accepted point of view is that from initial start up through to exit can take 8 to 17 years for a university spin out. To account for this somewhat lengthy development time, Mercia adopted a strategy of (i) investing across key sectors in which we have deep technical and commercial knowledge, (ii) seeking businesses with modest capital needs (typically £1-10m in total), (iii) balancing its portfolio across sectors and deal flow source with approximately 50% of the investments we have made deriving from universities in the UK and 50% (of which a large number are digital – not traditionally a strength from within the university sector) coming from sources outside of the university sector, and finally (iv) although we are a national investor – we have a strong emphasis on seeking investments across the Midlands, the North of England and now we are moving into Scotland; all very underserved regions in terms of capital supply.

But the real ‘magic in the box’ as far as we are concerned, is how we have successfully blended the management (via Mercia Fund Management, ‘MFM’; the wholly owned FCA authorised subsidiary of Mercia Technologies PLC) of third party funds benefitting from Enterprise Investment Scheme (EIS) and Seed EIS (SEIS) capital and directed this toward early stage and growth investment, which is then followed by the deployment of capital from Mercia’s own resources to scale rapidly what we refer to as the ‘emerging stars’. We have a reputation for supporting our businesses through their journey which is why the investment directors at Mercia (as well as the board of Mercia Technologies PLC) without exception have run, grown and exited businesses as their day job, latterly turning to acquire the key skills associated with making investments. The beauty of SEIS and EIS is the fact that our private investors benefit (if they keep their investment for at least 3 years) from 30-50% income tax relief and up to 20% is available as loss relief in the event of an investment failure. Furthermore, capital gains on investment exits are tax free! We practice the attitude of ‘fail fast’ and ‘resource the emerging stars’. In our opinion, the two most significant causes to failed investments are weak management and inadequate levels of capital – these are intrinsically linked and we seek to actively address both with our model.

What have we achieved in the last month?

It has been an undoubtedly busy and as you would expect me to say a highly productive January, and an excellent start to 2015.

Firstly, we have made a further investment in nDreams, one of the UK’s leading Virtual Reality software developers. nDreams provides innovative games and experiences to a market that could have a total worth of up to $4bn in the next 3-4 years. If you have not heard of Oculus, the Samsung VR-Gear (virtual reality headset coupled to certain Samsung phones), the Sony Morpheus (coupled to the Play Station) or the Microsoft HoloLens (augmented reality to be launched with the Xbox and for PC) then you have some 11 months to get up to speed and start saving for those Christmas presents! nDreams was in there at the beginning and downloadable games are available via the Oculus store now!

Our next investment of £1.5m was into yet another emerging star – ‘VirtTrade’. This company has sought to address the final area yet to go digital; trading and playing cards. First music, then movies and now the humble trading card.

Combined with the rapid expansion of smart phones, VirtTrade uses live feeds combined with the rapid expansion of smart phones you end up with cards in real time improving or losing value, with a trading environment no longer confined to the playground but expanded to the global market of trade over the internet. We predict within the next 12 months a disruptive approach that will eat into, but also markedly increase the size of, what is currently a global market for trading cards of over £2.4bn. VirtTrade’s engine is ideally suited to monetising current and historic content in a hugely engaging way that will appeal to their target audience of 6 to 26 year olds, all of whom are well versed in the digital world in which we now live. Do watch out for these businesses; virtual reality, augmented reality and the digitisation of trading cards are disruptions we expect to hit the market in 2015.

We also welcomed several valuable new additions our team, appointing one of the Midlands’ leading industrialists, Martin Lamb, as a non-executive director. His deep understanding of advanced engineering and UK innovation will prove to be invaluable across the Group. In addition, this week we announced that Peter Dines is our new Investment Director for Life Sciences. A highly successful entrepreneur and investor, Peter brings 20 years’ experience in the healthcare sector, holding directorships across a wide range of life sciences businesses.

And only today we announced that we had acquired the remaining 80% interest in the Mercia Fund 2 Limited Partnership. Mercia Fund 2 is a 10 year early stage investment fund which makes investments into university and non-university start-ups. This move signals the consolidation of our business operations, and gives us access to material stakes in a number of technology businesses, which could deliver significant returns for Mercia over time. It is also pleasing to note that six of our university partners are now Mercia shareholders, a strong sign of their belief in our investment proposition.

So a busy start to the year and February has not been any different! The UK is a hotbed of innovative technical solutions to often global problems and demands. We are well placed to accelerate the development of such innovations, as we say commercialising technologies, and I look forward to updating you alongside the Mercia team on our progress, as well as how the UK business landscape is evolving and addressing these challenges alongside us.