Meet the investor: Dr Mark Payton, Mercia Fund Management
Mercia's managing director on criteria he looks for in an entrepreneur, ideal investments, and sourcing prospects from 100+ monthly enquiries...
Firm: Mercia Fund Management Ltd (part of the Mercia Technologies PLC Group)
Name: Dr Mark Payton
Where are you based?
We’re headquartered in the West Midlands (Henley-in-Arden, Warwickshire). Mercia is a national investor with a particular focus on the Midlands, the North, and now moving into Scotland.
What kind of investor are you?
We are a leading UK technology investor. We are seen by entrepreneurs and management teams as the provider of hands-on ‘intelligent capital’ from start up through to expansion and scale. Many of our investments at the beginning of their journey have a modest revenue stream but with our support and deep sector knowledge we are privileged to have a portfolio of which approximately 20% (and growing) are profitable and cash generative.
We work closely with our portfolio companies to help them achieve their potential and a financial return for all parties involved, often taking a board position on each of our investments.
Our unique model blends the deep sector experience of our investment team, with our inside track on sector and macroeconomic trends, together with the provision of early stage and development capital via our tax-efficient seed enterprise investment scheme (SEIS) and Enterprise Investment Scheme (EIS) hybrid funds. Over time we are then able to deploy deep levels of investment from our own balance sheet to rapidly scale what we term as our ‘emerging stars’ providing substantial capital growth (and liquidity) for our private investors in our funds and capital growth for our own patient investment. What this does is provide a simple funding solution for our broad portfolio of companies whilst fuelling the development of sustainable high growth businesses within the UK.
What kind of deals do you finance?
We have a ‘grow your own’ philosophy and therefore like to begin our partnerships with businesses at their inception and often first external funding round. We will rarely invest our later stage funds in companies we do not have a seed stage investment stake in. Companies we will invest in will be exciting businesses that we feel have the potential for rapid growth and early commercial traction. They will be UK based and will qualify for SEIS. Our portfolio is split 50:50 between companies that emanate from our nine university partners and companies born from purely commercial environments.
Businesses coming to us from our university partners will often be research intensive, have strong intellectual property, and have the potential to be truly ground breaking. For these we work closely with the technology transfer offices of our university partners, along with providing ‘Pathfinder funding’ – pre-seed start-up capital that takes the form of a convertible loan. We often get involved operationally with these businesses, helping to establish a commercial management team around the core researchers and academics. We have experience of taking these sorts of companies from the lab through to IPO, case in point being our first portfolio realisation – Abzena PLC. Others are becoming global brands such as Science Warehouse (Leeds University spinout) and Allinea (University of Warwick spinout), operating on a profitable basis.
More recently we have begun investing in purely commercial, often digital start-ups. We have a deep understanding within sub sectors of digital and hunt for deals in these ‘sweet-spots’. An attraction of digital is that you can ask and answer the question of ‘does the business model work and can it be scaled?’ quickly. If it does we invest more deeply. If it does not – then perhaps this is the time to draw a line under that idea and encourage the founder or management team to try again within a new venture. Some of the exciting digital companies in our portfolio include VirtTrade, Soccer Manager and nDreams.
What kind of person do you invest in?
At the core of our business are the dynamic minds behind the companies that we invest in; entrepreneurs with the proven ability to execute. As any investor worth their salt knows, the success of an opportunity is dependent on far more than just a great idea. This is why we spend a great deal of time getting to know founders and management before any potential investment is made. Although every opportunity is different, there are a number of criteria that we look for in entrepreneurs:
a) Pre-investment traction – We don’t just invest in people that make things happen, we invest in people that have already made things happen. An idea on paper might claim that it can disrupt an entire industry but unless the founder has demonstrated this through its minimum viable product (MVP), interactions with potential users, or early revenue, we have little reason to believe it or part with our money.
b) Track record – A great deal of our most successful companies are led by industry veterans who have had previous successes. They know how to build great businesses because they have already been through the process before. For younger founders, they might not have necessarily grown and exited their own business before, but they have demonstrated their ability to execute by leading projects within larger companies or in organisations outside of the workplace.
c) Sector experience –We like to back people that know their sector better than anyone else. This could either be through them having worked in the industry previously, or through them having a specialist understanding of a technical area due to advanced study. The trenches is no place to learn how to use a rifle!
d) Passion – Building a business from scratch is hard. There will be highs and there will be lows, often within the same week. That is why genuine passion is so important. Unless the founder cares enough about the success of the company to be able to shoulder the hard times, the journey to success may prove too difficult.
e) Empathy & self awareness – Our business is a people business. We spend more time communicating with our founders than working on spreadsheets. As a result we look for people that we can get on with, who understand the importance of good relationships and the power of networks, and who get just how integral this all is to building a good business.
How do you source prospects?
We get in excess of 100 investment enquiries per month and some 60-70 business plans a month. These come to us from a variety of sources including our own commercial partners (recruiters, lawyers, accountants), our portfolio founders, and our extended network. Our investment managers make sure that they participate in as many outbound activities as possible and can often be found conducting coffee mornings at a number of incubators around the country, sitting on panels at events, and giving key notes.
What is your ideal investment?
No deal is the same but an ideal investment opportunity will be a company that has demonstrated early market acceptance by validation of their business model. Often this will be through early revenue, but may also be through strong commercial partners that provide a solid channel and route to market. The most attractive companies I see are the ones that are only raising finance someway into their journey. Often founders will have invested significantly into their businesses already, if not with hard cash, then through sweat equity. We back people first, in our sweet-spot sectors that offer the opportunity for us to help them scale to something that will be profitable for all over time.
What are your USPs?
Very few other investors have the resources, both in terms of capital and expertise, to support businesses from their early stages right through to exit. We find that the biggest headache most founders have is the continual anxiety around having to fundraise in the early stages of their business – it can be very distracting and can cause the team to lose focus on actually building their company! Mercia’s model of investment enables founders and management to focus their time and attention on growing the business, safe in the knowledge that as long as they hit the agreed business plan objectives, we will provide the requisite capital.
Another USP is our regional focus. The internet age promised to render geographical distance and location irrelevant, yet start-up capital in the UK is still concentrated in London and the South East. We recognise that there are pools of latent talent all over the country, and we aim to be their first port of call for start-up finance.
What are the hot sectors?
We focus on four core sectors including: Life Sciences; Advanced Materials; Engineering and Specialized Manufacturing; Digital; and Electronics and Hardware. Within these there are definite sub sectors to be exploiting – but we are not going to tell you what these are!
Three things a company should be able to offer an investor?
a) Early commercial traction
b) The beginnings of a team that has complimentary skill sets
c) Deep market knowledge
What is the cardinal sin when looking for investment?
Know your ‘addressable market’, think carefully through your route to market, think about what the scalable business model is to return revenue growth and have you got the team to execute the plan. This can be captured in a 15 minute presentation and a three to five page executive summary. If not, go back and summarise. Mercia, as with other successful investors, receive an awful lot of approaches for investment. Being sharp and snappy improves air time and therefore face time.
What continuing involvement do you like in an investment?
We always take on a board seat or observer seat with our investee companies and will expect monthly board meetings and fortnightly updates. We like to think we help where we can on a strategic level, but also assist our companies with recruitment, finance, and operational assistance where necessary. We hold seminars at our headquarters specifically for our portfolio (on R&D tax breaks, grants, legal agreements, business optimisation etc.) and we encourage our portfolio to use our facilities which include access to a partnered hotel and golf/leisure facilities.
What has been your best performing investment to date?
No one company stands out as we have a group of emerging stars that are outperforming their peers. Our first exit came through the listing of Abzena PLC on AIM last year. We receive dividends from a number of our investments – VirtTrade has recently signed an exclusive agreement with Panini, and Dab Gaming are currently working on free to play bingo and casino games with Northern & Shell – to name just a few!