The radius of success: Regional equity

Currently, 75% of venture capital funds are being invested in London and the South East, supporting the London ecosystem’s preference for proximity to the companies they invest in. This need for closeness is shared by investees, with 65% of North of England founders wanting their investors to have a presence in their region. Founders also seek strong personal relationships with their investors and expect that this will be extended to the deeply embedded network of advisers and sector experts that an investor should be bringing to the table. In addition to capital, these networks are critical to supporting investees and creating self-sustaining environments for business growth and highly skilled job creation throughout the system.

An example where this alignment produces a thriving local investment community is the North East, where two thirds of the domestic investors in this region’s businesses are also based in the region. Amidst the backdrop of fast growth and M&A activity during the region’s green power transition, intrepid sustainable start-ups are seizing the moment. The diverse businesses that are ascending are evidence of a new sustainable entrepreneurship emerging, supporting the North East region as it continues to make huge strides to reposition its economy amidst a declining oil and gas sector.

The story so far

Our North East team has invested in several successful businesses. Since the office was launched in 2014, c.£50 million has been invested in over [x] businesses, a number of which have successfully leveraged the opportunities in the fields of energy transition and sustainability and other diverse sectors.

The Clean Tech start-up Equiwatt Ltd has gone from strength to strength since Mercia’s first investment in 2020. An energy management platform that provides a form of demand side response (‘DSR’) to support domestic users to conserve power by automating appliance switch-off during peak times; this business is thriving in today’s energy economy.

Aligned with the net-zero carbon agenda, Algorithm People is supporting carbon reduction efforts through its scheduling software that supports fleets (like those of delivery services and local councils) to carry out operations in the most energy-efficient way. Algorithm People saved 37 thousand tonnes of CO2 just last year, with an average 26% reduction in emission costs for its clients.

Better practice

Regional investment should not be defined by investment infrastructures that mimic those of London – effective but exclusive. Mercia has proven that optimised returns are propelled by deep industry experience and powerful regional partnerships that drive the deal origination, which has allowed us to see 59% of deals transacted in the regions. This geography extends far beyond the UK’s main conurbations. Focusing on investing in the highest quadrant of businesses that have appropriate pre-money valuations and where we can provide support in achieving the commercial drivers of value creation takes Mercia into areas such as Teesside.

From Newcastle, the journey southward takes you to a wealth of innovation in a region that has historically suffered from underfunding and unemployment rates, often higher than the national average. The area is establishing a reputation for innovative game studios to the extent that Teesside University now specialises in Computer Gaming qualifications with industry placements. Mercia’s understanding of the area, and its legacy in the gaming industry, helped it uncover SockMonkey Studios, now a Mercia portfolio business that is just one example of the gaming talent emerging in the area. Founded in 2013, the business’s leadership experience includes tenure at Optimus Software, one of the first video gaming studies in Teesside, sold to US publishing giant Acclaim Entertainment. SockMonkey now employees c.40 people and has launched its own IP FishTanks! After building its reputation in undertaking third-party development work.

Mercia’s Yorkshire and Humber teams, based in Leeds, do not just overlap with the North East team in providing intersecting pools of investment. Their shared capital goes beyond finance to embracing both teams’ expertise and specialisms, particularly around Clean Tech and Deep Tech. Redcar-based Nova Pangaea Technologies, one of Mercia’s newest direct investments, is a business focused on production bioethanol used in sustainable aviation fuel other biofuels, and biochar to address some of the most pressing climate concerns of today.

CEO Sarah Ellerby has earmarked its latest £5.25 million investment to build its first commercial plant as its base at Wilton in 2023 and represents just one of this regional team’s businesses that are building the industries of the future.

Head down the M1 to Sheffield and you will find Tribosonics, which continues to innovate within the sensor field, delivering entirely novel solutions to a new set of engineering and manufacturing challenges. In addition to its smart sensor technology, the business is making a financial commitment to drive an award-winning apprenticeship programme to support the continued regeneration of the region in which it does business.

Moving North West brings the focus to businesses such as Intechnica and Netacea, which is Intechnica’s cybersecurity arm that spun off as a standalone company. This move to separate the two Manchester-based companies followed a period of significant expansion for both businesses. In December last year, Intechnica raised funding of £8.5 million, made up of investment from Mercia’s proprietary capital, its Northern VCTs and its other third-party funds. Our holding in both companies will be equivalent to our previous holding in the combined group, which, at the time of the last investment, was 56%.

The Midlands remains Mercia’s home region and has long been an important investment market. Mercia was initially founded to address the funding and investment gap that was so apparent in the Midlands. Without Mercia, the success of businesses such as Axis Spine, a Med Tech business delivering modular spinal implants, would be near impossible. The architecture of this business was a result of a meeting of the minds between Peter Dines and Jon Arcos, Mercia’s COO and Axis Spine’s CEO, respectively. As co-founder of the business, Peter was able to bring his immense experience of starting and scaling Life Science companies to ensure commercial success for Axis, with the right product/market fit.

Mercia announced its direct investment into Axis Spine last month, as part of a £10.8 million funding round alongside Mercia’s managed funds and American-based venture house, MedTex Ventures. Axis Spine is in a unique position to capitalise on the $[xxx] million market in the US following its FDA approval, with additional product development that will go further to resolve the unmet clinical need of cage subsidence.

Coventry-based Warwick Acoustics has demonstrated the importance of its agility. The pace of change in moving to cleaner energy, as witnessed by innovations in the electric vehicle sector, has benefited Warwick Acoustics’ recently developed automotive audio solution division, which has seen the business engaged in discussions with a wide variety of automotive original equipment manufacturers (“OEMs”). This comes on the back of having successfully demonstrated its electrostatic acoustic panel technology with a premium marque vehicle for a globally recognised car brand.

Impact investment is also central to the success of Mercia’s expansion in the South West. Our investment team, permanently based in our new offices in Bristol’s Clockwise technology hub, has already supported two strong SaaS businesses led by local entrepreneurs Dipa Mistry Kandola and Gill Stewart. Both the Cloud8 and RoleMapper investments epitomise the diversity and inclusion we seek across our investee companies. The global agenda of sustainability, de-carbonisation and social mobility, especially when leveraged by a clear D&I plan, is fundamental to Mercia’s investment thesis and that of our key shareholders, including British Business Bank.

The South West region’s sectoral strengths include Life Science, Aerospace/Composites, Cyber and Enabling Technologies, all of which are closely mapped to Mercia’s investment focus. These differing technologies, and their established support networks, have created a rich environment for start-up and scale-up activities.

The rich vein of exceptional SMEs branches out to encompass those that address immense issues, such as global health. Oxford has been a hub that  has delivered tremendous success for Mercia, not just in terms of what we seek in commercial returns but, equally, in successfully delivering critical solutions onto the world stage, aligned with our purpose-led philosophy. From the Native Antigen Company to OXGENE™, these businesses have had a vital role to play in the area of immunisation. OXGENE was a critical technology behind COVID-19 antibody therapy, while the Native Antigen Company was one of the world’s first suppliers to release commercially available SARS-CoV-2 antigens. Continuing in Mercia’s tradition of sourcing businesses that intersect science and technology, its recent investment into Oxford-based Optellum, a Med Tech business that provides a breakthrough AI platform to diagnose and treat early-stage lung cancer, speaks to Mercia’s track record in the diagnostics sector. Having raised $14 million in a Series A funding round, Optellum will look to scale its base, operations and commercial launches in the UK and USA. This funding round was led by Mercia, which structured this significant syndicate investment that included Californian VC house, Intuitive Ventures and New York-based Black Opal Ventures.

The health sector is not the only area that has a voracious appetite for innovation. World-leading VR game publisher and developer, nDreams, continues to thrive. Critical in the supply chain supporting other innovative businesses, nDreams is well-placed to capitalise on the augmented reality (“AR”) and VR market, which is expected to grow to $209.2 billion this year, and leverage its continued relationship with Meta, which is currently the market leader with Oculus being the largest vendor of VR headsets, followed by Sony.

In March 2022, nDreams secured £20 million of new investment from European games investor Aonic AB and is currently developing further IP. Its newest VR title, which is based on the Ghostbusters IP in conjunction with Sony Pictures Virtual Reality, was introduced by Mark Zuckerberg in April 2022 at the Meta Quest Gaming Showcase.

Great companies really do thrive in the regions.

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