EXCLUSIVE: Mercia is looking to invest up to £130m into regional start-ups in 2023, according to its CEO.
The VC is sector agnostic – though it steers clear from fintech and B2C – investing in 10 to 12 seed-to-Series A stage companies each month.
“We’ll be backing new businesses, but we’ll almost certainly have to look after our existing portfolio,” co-founder and CEO Mark Payton told Growth Business, referring to the choppy economic waters the VC will have to navigate.
“I think the technology sector and certain sub-sectors are going to be hit reasonably hard. B2C, fintech and crypto will be given a big hammering.
“We don’t have those, but that sentiment will spill over into other sectors.”
Mercia is one of the UK’s most active regional investors with a particular interest in software and life sciences.
In 2022, the VC invested £124m into 148 businesses, over 90 per cent of which are based outside London.
The investor also has eyes and ears on the ground, with 11 offices located in areas including Newcastle, Preston, Sheffield, Bristol and a new office in Hull which opened in December.
Mercia’s regional strategy is the result of Payton’s experience raising funding himself while studying at Oxford, where he found accessing capital for his team’s spinouts straightforward but discovered was a “nightmare” for anyone out in the regions.
“If Mercia and BGF didn’t exist, the regions would really struggle”Mercia co-founder Mark Payton
“The UK’s not massive, and if you were two or three hours outside of Oxford or London you were standing next to no chance of accessing capital,” he said.
Part of the reason for this, Payton believes, boils down to infrastructure and logistics. “It’s quite efficient in London and very inefficient outside of London bar Oxford and Cambridge,” he said. “In London everybody gets to see deals, everybody’s within a 45-minute tube journey and it’s of a size where it can be pretty self-sufficient.
“In the regions, it is much more fragmented, and the intermediary community is much more disjointed.
“What Mercia tries to do is be at the heart of that and become the network leader. We run regional events, we reach out to every part of the UK, and we spend a lot of time networking with those regional intermediaries.
“If Mercia and BGF didn’t exist, the regions would really struggle, I would argue.”
With a recession likely to last the entirety of 2023, Payton is pragmatic but optimistic about regional start-up performance in its portfolio.
“I’ve been through a couple of recessions before, this will be the third. In every case, syndications fall apart, investors focus on top performers and don’t invest in new ones.
“The top two thirds [of your portfolio] you should be supporting because who knows which ones will catch up and overtake over time.
“The businesses we back typically don’t need more than £10m or £20m in total investment support. Because of that, in the event of recession we can support them.
“Regional businesses tend to take a little bit longer, bootstrap more and use a little bit less capital.”
Payton also believes Mercia’s sector agnostic and long-term capital approach could provide a good platform to ride the recession wave.
“We’re in it for as long as it takes,” he said of the VC’s relationship with its founders. “By having interlinking capital, rather than one fund, you can do that.
“About two years ago, it starting working and now it’s continuing to deliver. It’s quite an exciting phase in our life at the moment.”
What Mercia looks for in founders:
You’re coachable: “You need to have an open and pragmatic approach and be open to offers and suggestions. Questioning direction – I love that. If they’re not open but they have a great business – I wouldn’t back them.”
Willing to be surrounded by people better than them: “There are people who recruit below them, and above them. We look for the latter – it comes with a degree of confidence.”
An ambitious growth mindset: “The chances are there are three or four people in the company and they’re already talking about the next thousand employees.”
Greed: “Although no-one actually talks about greed. As soon as you become a co-owner as an investor you’re pretty much aligned with the founders. If they’re protecting their value, the chances are they’re protecting your value too.”