University spin-outs need more capital to survive and thrive

With increased interest in tax-efficient Seed Enterprise Investment Schemes (SEIS), the debate continues regarding whether £150,000 per start-up is enough to develop an early stage business in today’s economy. But for university spin-outs that are innovators first and business people second, are investors doing all they can to help these start-ups to succeed?

Since its introduction in 2012, the Seed Enterprise Investment Scheme has helped some 1,250 businesses.

However, with just £150,000 per start-up available to small and early stage businesses, many of these start-ups will face fundamental problems due to the lack of follow-on capital.

Whilst the Seed EIS is helping to pave the way for business growth, more is required if George Osborne is serious about ‘backing British businesses all the way’.

So what can be done? Mercia Fund Management’s request to the Chancellor is to expand the level of seed investment to at least £250,000 per start-up. This increased level will give early stage companies the capital needed to accelerate growth, increase export potential and create strong employment prospects.

Funding alone isn’t the answer though. Start-ups throughout the UK face a double dilemma. In addition to capital, most will need an investment partner with strategic input to support them over the medium to long term.

Take for example, the university spin-out sector which offers exciting new opportunities. We work with eight universities that are behind some of the most innovative new businesses in the UK today; the issue however is that the founders of these companies are scientists and technologists first and business people second. 

The level of guidance necessary for university spin-outs and other start-ups is often provided by highly networked and seasoned industry veterans, and is often not available for £150,000 funding levels. For example, we are witnessing seed funding offered by crowd-funding sites, but these platforms offer capital but little else to help start-ups to develop and thrive.

Providing a blend of early stage, development and growth capital, hybrid EIS/SEIS investment funds, cost effective fully serviced accommodation and full service offering to support and accelerate business development can help address not only the immediate funding requirements of early stage companies, but can also drive future growth through follow on capital. Mercia Growth Fund 3, for instance, backs its portfolio from initial SEIS investment to the medium to long term funding through EIS, whilst providing an essential support framework to help accelerate the growth in portfolio companies.

LM Technologies is just one Mercia Fund Management portfolio company – this WiFi and Bluetooth manufacturer saw revenue increase by 30% since investment, whilst biotech company PolyTherics’ revenue increased by 200%. Based on technologies from the University of Warwick and Imperial College, PolyTherics has collaborated with spin-out Spirogen Limited in recent years to increase its research and development methods. Spirogen Limited is a spin-out from several institutions, including University College London.

Following a recent funding boost from Mercia Growth Fund 1 and the company’s existing shareholders, Oxford-based The Native Antigen Company’s (NAC) revenue has increased by 40%. NAC was a spinout from Hybrid BioSystems (a University of Birmingham spinout also backed by Mercia Fund Management, that was renamed Psioxus Ltd).

Sustainable construction advocates Ventive Ltd received an equity raise of £900,000 earlier this year, and has since reported strong revenue growth and will no longer require further funding. High-tech loudspeaker specialist Warwick Audio Technologies secured an investment package of £1.25 million. The Coventry-based company and University of Warwick spin-out has growing turnover and will likely reach profitability within its first year of trading.

By expanding the amount a new company can receive as part of a seed funding package, investment in start-ups and alongside social enterprises will be further encouraged. In addition, the increase in capital available will provide a better equipped platform for UK start-ups to nurture a business through development and early trading, which can help reduce the failure rate in early stage enterprise.

An increase in seed funding will also ensure investors find it more attractive to invest here in the UK, whilst providing support for thriving British businesses in need of initial and follow on capital.

In the meantime, Mercia Growth Fund 3 will aim to support the small yet fast growing and revenue-driven businesses within the technology sector. We see a huge opportunity for success in many technology driven fields, especially in e-commerce and digital sectors. Our recent appointment of Mike Hayes, the ex CEO of SEGA Europe underlines our belief in attractive returns in these sectors.

The target closing date for Mercia Growth Fund 3 is 31st March 2014.