Bringing together industry specialists and investment expertise from an investment team with a strong track record, Mercia actively invests across a wide range of sectors including life sciences and biosciences, electronics, materials, manufacturing and engineering, software and the internet, digital and digital entertainment.
By Bernadette Fallon
With the UK creative industries worth in excess of £100bn per annum according to figures released by the Department for Digital, Culture, Media and Sport, this has been an active area of interest to the company for a number of years, as one of Mercia’s investment managers, Chris Kilroy, explains.
“We have invested in a range of companies in the sector across the United Kingdom via our third-party funds under management and have selectively invested in a small handful via Mercia’s balance sheet, such as nDreams, an award-winning virtual reality developer and publisher. An area we are particularly active in is the immersive technology sector, having invested in a number of companies operating across virtual, augmented and mixed reality. Given that these technologies have broad market applicability across a wide range of sectors, including digital health, digital manufacturing and the creative industries, we view the immersive technology sector as one of the most innovative sectors to invest in right now.”
UK R&D: strong prospects for the future
Taking a broad view of the R&D coming out of the UK currently, investment manager Bill Yost says the UK typically does well in terms of rankings on R&D spend, innovation, and university research when compared to the EU and the rest of the world.
“Where the UK does particularly well,” he reveals, “is in the number of current ‘unicorns’, which are privately-held start-up companies which have achieved a valuation of $1bn or more. Unicorns are exactly the types of start-ups that VCs seek to invest in, as a $1b valuation is considered an extraordinary success. Mercia has seeded its own unicorn, Blue Prism, using third party funds from the RisingStars Growth Funds, generating a cash multiple of 105x on our investment of £900,000.”
In terms of the number of unicorns by country, as of January 2019 the UK ranked 3rd behind the US and China according to CB Insights.
What makes the UK relatively good at generating unicorns?
“To understand this, it is instructive to look at the industry sectors and enabling technologies behind them. Of the 16 companies listed by CB Insights, six are focused on fintech, the most of any sector. This speaks to the dominant position London holds in the financial world and the culture of innovation within the City,” says Bill.
“When looking at the technologies which underpin the UK unicorns, software, data and telecoms emerge as significant themes. From the augmented and virtual reality focus of Improbable, to the analytics of Benevolent.ai and the data handling of Global Switch, the UK has demonstrated the ability to capitalise on the growing importance of information networks and computing – after all even Deliveroo is driven by an app.”
In terms of time to realising value, the contrast between software and other firms can be striking. According to Beauhurst, Benevolent.ai reached unicorn status within two years, while Brewdog and Oxford Nanopore both took a decade.
“That isn’t to say that food & beverage or healthcare start-ups aren’t worth backing, but investment in software driven businesses have the potential to realise quick returns,” says Bill. In light of this, Mercia has a targeted investment strategy to actively invest in software, middleware and platforms within the immersive technology industry in particular.
“In summary, by one narrow metric, the number of start-up unicorns, the UK seems to be doing well in generating and capitalising on R&D. Recognising that this success is concentrated in the fintech sector and in software or data driven businesses raises a number of questions. Notably, are there other UK sectors which can emulate the success of fintech unicorns? Why does the UK lag behind in terms of hardware or pharma unicorns? And which sectors or technologies will fuel growth in the future?”.
Given the applicability of virtual, augmented and mixed reality technologies to a range of global industries and the unique insights, performance improvements and efficiencies that such technologies can provide, Mercia is confident that companies operating within the sector have the ability and support from a number of stakeholders within the UK to reach unicorn status. Although this will take time.
He does point out however that different perspectives can arrive at very different results when attempting to value R&D. While consultants frequently attempt to quantify the value of the UK’s R&D – a broad spectrum of activities involving academia, industry and government – this is a difficult thing to measure.
“As a former ‘innovation consultant’ myself, I understand the flaws in the models used. Not all R&D is intended to generate an economic return – the intention may be for social or humanitarian good. Additionally, the timescales involved for realising the value of some R&D can be measured in decades, making economic returns a severely lagging indicator. From the point of view of a venture capitalist, the relevant factors in determining such a measure are the degree to which R&D contributes to investible start-ups and the speed and scale with which they see a return.”
Creative industry start-ups: key investment advice
“There are a range of funding options available to small and medium sized businesses across the UK,” says Chris Kilroy. “Providers of grant, debt and equity funding are all active in the creative industries sector. At Mercia we provide both debt and equity funding, and we manage a number of different funds across the country.”
Understanding what type of funding is required, the amount of funding required, how that funding will be used and what will be achieved with the funding is key when approaching providers of investment capital, he explains.
“We would also encourage start-ups operating in the sector to thoroughly research the criteria of an investor before approaching them, to ensure that they’re well aligned and suitable for their company.”
Partnering with Immerse UK’s Augmentor programme
“In June 2018 Mercia was proud to partner with Augmentor, a 10-week investment readiness programme that helped the next generation of immersive technology companies by providing technical and business mentorship from industry partners, experts and investors,” says Chris.
Partnering with Augmentor provided Mercia with great visibility of and access to the latest innovators within the sector, Chris reveals. The programme also enabled the company to leverage its experience investing in and supporting immersive technology companies to help the cohort of companies over the course of the programme.
Two important investments for Mercia, in both the entertainment and non-entertainment sectors within the immersive technology industry, have been nDreams and Gorilla In The Room.
nDreams, a developer of high-end virtual reality entertainment content, won its first Mercia investment via the company’s third-party funds in early 2014 and later received scale-up capital via Mercia’s balance sheet to help it capitalise on available opportunities. And while consumer adoption of virtual reality headsets has proven slower than expected, nDreams has successfully developed key partnerships with industry leaders such as Oculus, explains Chris.
“It has also recently created a dedicated team to create virtual reality games and experiences for the high-growth location-based entertainment (LBE) market. We’re looking forward to supporting nDreams as they continue to make commercial progress moving forward.”
Mercia is also particularly interested in supporting companies that are deploying immersive technologies within global industries that have previously not had access to, or the ability to access and incorporate, such technologies.
“One of our portfolio companies, Gorilla In The Room, has built a mobile research platform that provides market researchers with the ability to supercharge their research with the use of virtual and augmented reality technologies,” says Chris. “While it can be difficult to convince researchers in the market to displace tried and tested methods of operating with immersive technologies, the evidence that Gorilla In The Room has collected suggests that doing so can provide researchers with more accurate and timely insights into how consumers make their purchasing decisions.”
With several key players in the market and a strong investment portfolio, the future is looking bright for this investor in the sector.
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Picture courtesy of nDreams