Written evidence submitted by Mercia Asset Management



  1. The current state of the venture capital industry in the UK, including opportunities and threats, such as the availability of domestic capital to allow firms to scale up in the UK.


Mercia’s focus is on SMEs; micro-cap/small cap businesses that are customarily private. Powerful relationships and deeply embedded ecosystems provide Mercia with access to a wealth of opportunities across the regions. From its 19 university partnerships to Mercia’s non-executive networks, the business has received nearly 15,000 requests for investment over the last five years and has invested in just over 1,000.


Our proven hybrid investment model allows us to be proactive in supplying overlapping forms of capital (what we term Complete Connected Capital) ensuring the provision of seed capital through to growth finance for UK-only regional businesses. These businesses are mostly looking for 300,000 to £10million investment and have quite modest capital needs. Compared to businesses located in the triangle of London, Oxford and Cambridge, regional businesses also typically take longer to grow. Examples of success from Mercia through its Complete Connected Capital model, being able to take a longer-view, include Faradion that was sold this financial year for £100million having received its first seed investment from Mercia at its inception in 2010, and OXGENE, which was sold in 2021 for £98million, having received its founding seed investment from Mercia in 2010.


The regions invariably feel the chill of a downswing ahead of the ‘London’ triangle but, as a result of British Business Bank’s (“BBB”) regional funding, EIS and VCT, Mercia is able to work closely with its portfolio companies to, in part, shield them from any syndication risk as other providers of capital withdraw (as it has done on previous occasions) from the UK regions. Over the last five years Mercia has secured over c.£752million of co-investment.


Since the schemes’ introduction, EIS and SEIS have helped over 31,000 SMEs raise over £22billion. Approximately 66% of these being in London and the South East alone. In the last five years, Mercia has added 153 companies to its EIS portfolio. nDreams, which has been a Mercia portfolio business since 2013, when it received EIS investment, typifies the success of EIS as a stimulus for SME growth. This VR games developer and publisher recently received £20.1million investment from Aonic as it continues to scale the business on a global platform.


£2.4bn[1] of UK VC funds were raised in 2020, yet past research by the University of Leeds and Imperial College London, tracked the value and number of equity finance deals with SMEs and knowledge-intensive and high-growth firms to show that 75% of all invested funds go to London and South Eastern companies, and that businesses outside of London are up to 50% less likely to secure equity funding.


In many ways, this is the crux of the dilemma that faces businesses in the regions, insofar that many key decisions being made, relative to the capital solutions needed to improve the funding gap, are being based on findings that are mostly London-centric. Considering the funding gaps that have so far been insurmountable, and the barriers that continue to be perpetuated by the complexity of the needs of the regions, we have a few simple recommendations:







Remove the EIS/VCT sunset clause and make these schemes permanent. We are starting to see an increased nervousness from advisers about recommending VCT and EIS to their clients due the sunset clause and the potential loss of EIS / VCT tax reliefs. With over £2.7billionn raised last year in the UK for SMEs (£1.6billion in EIS and £1.1billion in VCT), the loss of this financing would be acutely felt by regional SMEs.


To enhance VCTs to the benefit of the UK’s regional SMEs:

-          Extend the period for which proceeds from disposals are disregarded for the purpose of the 80% qualifying holdings requirements to 36 months (from 18 months), thus allowing VCTs to re-cycle proceeds back into SMEs.


To enhance both VCT and EIS to the benefit of regional SMEs:

-          Remove the age limit for SMEs. Regional SMEs tend to take longer to reach a need for accelerated growth capital, the age limit prevents such companies accessing VCT / EIS capital whilst the SMEs are still meeting ‘the spirit’ of the schemes.



  1. The level of co-operation/integration between start-ups and established industry


This can be addressed on several levels:


-          The investment industry

-          Talent access

-          SME commercial partners


The investment industry

In the regions, Mercia is, principall, the first institutional investor in SMEs and is focused in providing time, resource and building syndication into these businesses. Mercia does work alongside, or follows on from, business angels (utilising EIS). However, Mercia’s exposure to business angels has suggested that there is a low level of investment activity from this investor group in the regions (versus the London triangle). Mercia applauds the work of the UK Business Angel Association with BBB to address this short fall in the regions.


For every £1 invested by Mercia, in the last five years, Mercia has brought in an additional £1.42, enabled across all its funds including EIS, VCT, Future Fund and the regional BBB capital it manages. Capital does not typically seek out regional businesses, so Mercia must seek out the capital and the continuation of initiatives such as the angel co-invest fund, next generation regional funds and the matched Future Fund are to be encouraged.


Talent access

There is a genuine skills crisis across the UK that includes regional SMEs. The visa system will, in part, address this. Mercia is therefore working with regional universities, such as the University of Warwick, to bring on board talented individuals from disadvantaged backgrounds into the company. This acts as a kick start to their career as these individuals benefit from exposure to the broad range of activities Mercia undertakes. Mercia will also work with its portfolio to do the same thing. The skills shortage is a long-term issue and Mercia applauds the work that the University of Warwick is doing to turn this challenge into an opportunity. Can the government put in place incentives to encourage more of this activity perhaps?


SME commercial partners

In Mercia’s experience, regional businesses (through necessity) have actively engaged with commercial partners from an early stage. This is one of the many under sold strengths of regional businesses.



  1. The operation and effectiveness of the current tax incentives (such as the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs)) in the venture capital market, including any options for change.


Please see Question 1.


Mercia passionately believes that VCT, EIS and BBB’s regional capital have been transformational for the regional SME base. Mercia is seeking optimisation and certainty over existing schemes rather than their withdrawal and the introduction of new initiatives. There continues to be regional disparities compared to the triangle of London, Oxford and Cambridge however, there are increasing positives in the regions and Mercia believes the continuation of existing schemes is critical to the levelling-up agenda.



  1. The operation and effectiveness of the regulatory regime(s) concerning venture capital.



No comment



  1. The role of other key bodies, such as the British Business Bank and the programmes which it oversees (including the Future Fund and British Patient Capital), and the Advanced Research and Invention Agency, and how they can support the venture capital market.


In BBB’s early days, someone once said: “Our role at the British Business Bank is not to pick winning investments, it’s to pick excellent managers, and would-be managers, capable of picking and supporting winning investments.” The Future Fund was an excellent example of this from Mercia’s perspective. When COVID-19 hit the UK, this swift initiative was essential in supporting regional businesses when syndication risk crystalised rapidly.


British Business Bank

Finance is the catalyst to a functioning ecosystem. The BBB’s activities in developing and critically co-ordinating the provision and deployment of capital into the regions, e.g. Northern Powerhouse Investment Fund (NPIF) and Midlands Engine Investment Fund (MEIF), are essential. This combined with other initiatives (e.g., ES and VCT) leads to the attraction of other capital into the regions, which then leads to the creation and establishment of advisers – therefore creating a self-sustaining environment for business growth and highly skilled job creation throughout the system. BBB’s programmes provide the environment for long-term support communities across the regions to exist, mature and recycle capital investment. This in turn provides for greater levels of professional advice, the creations of networks of brokers, corporate finance experts, non-executives/business mentors and legal companies that are critical to SME growth. It is this network that provides and safeguards a framework outside of the funds, offering a much wider collaboration and intervention.




Empower British Business Bank with further funds, with the ability to expand both the quantum of investment and its remit in investing these funds – focussed on UK only initiatives.


The creation of active AIM funds focussed on nurturing the next generation of businesses in the UK (rather than losing these SMEs to overseas through trade acquisitions and overseas IPOs) is the missing piece of the equity gap finance in the UK and would be an excellent area for BBB to focus on as the UK regional businesses continue to seek growth and development capital.


  1. The merits of policy proposals for strengthening the venture capital industry in the United Kingdom, such as:


One must always recognise that venture is risk capital. There is a high probability that a venture investment will fail, with the returns from a the few outweighing the loss from the many.


This results in a resource-intensive approach to making and managing venture investments, as well as a need for diversified portfolios accounting for economic and sector cycles. Because of this, and particularly at the earlier end of investment (the sub-£10million investment range), government support (be it through public sector intervention, as with BBB, or through beneficial tax regimes such as VCT and EIS) is critical. As one looks to other sources of capital deployment, one should not lose sight of the capital risk. Tax-efficient schemes such as ISAs do lend themselves toward venture. Pension funds will need to be positioned at the later end of venture capital to manage the risk of failure. If government were convinced to allow pension fund capital to invest in later-stage businesses, in the sectors that are strategic in allowing the UK to retain its status as a ‘science superpower,’ this could contribute to the eradication of the funding gap for later-stage businesses. Pension funds at a local level have long since been an intrinsic investment partner with Mercia. Mercia’s lower-risk private equity funds have had significant support as drivers of progress in improving regional employment and in the type of businesses and management teams that deliver sustainable domestic growth.





To expand the apprenticeship scheme toward high-skill job creation to well-educated individuals from disadvantaged backgrounds in partnership with regional universities.


It is vital that the UK's workforce has sufficient scale, diversity and breadth to meet the challenges and opportunities of a more innovative economy and society.


Unlike many London-based investors, Mercia’s employees live and work in the communities in which they invest. This enables us to provide direct and authentic local support to SMEs within the UK’s regions. Providing rewarding and exciting investment careers beyond the capital, limits talent drain away from the regions, in addition to supporting regional businesses to grow and develop their own talent within the regions.


Diversity that reflects our regional communities

Mercia has identified that traditional and indeed established routes to access and onboard the employees that reflect the demographics of the customers and communities it serves have limitations. Providing the diverse opinions and points of view to reimagine Mercia’s products, process and services requires a team representative and reflective of its communities.


The absence of diversity can only be solved at the root of the problem, which is typically at an educational level. Addressing this in the context of the UK skills gap means distinguishing the types of talent Mercia wishes to attract and ensuring that it makes the level of commitment and investment to attract and retain these employees.


The regions offer a vast sway of diversity and a number of educational initiatives have already been established to safeguard admission to their suitably structured degree programmes. These universities are now centres of excellence in ensuring that previously disenfranchised groups of regional and local communities have access to higher education. One that Mercia supports is the Widening Participation Programme spearheaded by Warwick University, which supports students from socially and economically disadvantaged backgrounds. We plan to recruit students initially into our paid internship programmes. We intend that these interns will progress their careers with Mercia through potential recruitment into Graduate roles with us once they finish their degrees.


In-house training

Mercia has a sophisticated learning and development platform that delivers a range of education and training programmes and modules that have been tailored to support each employee’s learning requirements. Upskilling the existing workforce to their full potential, and providing clear and supported pathways for professional progress limits attrition but equally, increases the skills of new entrants.


Mercia has a number of initiatives that are designed to support those that struggle to find suitable jobs because of the limited work experience accumulated whilst studying or that are disadvantaged in accessing this experience. The Skills Builder Partnership is designed to help school students build key skills and be better prepared to enter the workplace. An informal internship programme has been established across the UK with students from universities such as Liverpool University, either shadowing various colleagues across the Group, or working specifically within one division or team to develop and gain practical experience in their chosen field.





Businesses such as Mercia are investing in developing home-grown talent and creating a more inclusive and diverse workforce, but there remains a pervasive skills shortage in certain areas across all industries. According to techUK the tech industry is seeking to place candidates into nearly 100k vacancies every month and as traditional industry seeks to drive their own digital transformation, all sectors of the economy are facing significant recruitment issues, exacerbated by COVID-19, the worst affected being hospitality, construction, logistics and manufacturing. The points-based immigration system is starting to gain traction, however, providing a solution for some employers looking to source the skills that they need outside of the UK. The visa solution has expanded the range of roles suitable for sponsorship - nearly doubling, and the minimum salary requirements have been reduced significantly.



Where the Global Talent Visa allows for fast-track entry into the UK for the world’s top scientists and researcher, perhaps an equivalent scheme could be provided for niched/specialist or acute talent requirements, particularly in emerging technologies and Life Sciences.



No further comment


  1. The effectiveness of any other government or public sector intervention in the venture capital industry.


No further comment


  1. The effectiveness of government policy around venture capital in meeting wider government objectives (for example: around “levelling-up” and tackling regional inequality, the aim for the UK to be a science and technology “superpower,” net zero).


Since they were introduced, the EIS and SEIS have helped over 31,000 SMEs raise over £22billon. In 2020 to 2021, 3,755 companies raised a total of £1,658millon of funds under the EIS scheme. Over the same period, 2,065 companies raised a total of £175millon of funds under the SEIS scheme. This funding continues to be unevenly distributed across the regions of the UK. This is also borne out by the HMRC stats showing that the proportion of the amount of investment in companies registered in London and the South East was 65% for EIS and 68% for SEIS in 2019 to 2020.


VCTs raised £1.13billon in the 2021/22 tax year – 65% more than last year. Although VCTs invest across the whole country, the existing VCT rules are designed to focus investment into early-stage technology companies, which the VCTA claims are more concentrated in London and the South East.


Therefore, it seems that although there is a range of capital being made available to allow firms to scale up in the UK, there are a number of barriers to the success of this money reaching the regions:


Close-knit networks around London increase the chances of attracting funding with entrepreneurs who have attracted investment in the past likely to be backed again. Even crowdfunding – the most democratic and boundless of funding vehicles, has not been as persuasive in the regions, with the bulk of investors located in the South East and investing in companies near to them.


In addition, a recent CMRC report showed that when analysing distances between investor and invested company, the number of equity investments decreases with the distance from the investor. The frequency of equity deals also decreased with the distance between the invested company and the nearest investor’s office.


Life cycle and sector are also critical – if the UK is trying to retain its status as a science superpower, then recognition that the very industries and sectors that will preserve this reputation are in sectors such as Deep Tech and Life Sciences. These R&D intensive companies take more time and more money to reach later VC stage. And these businesses are as much regional-based as they are London and the South East-based. In addition, regional SMEs are typically what we term ‘enabling techbusinesses.These normally require lower amounts of capital and are intertwined with the more capital-intensive ventures. These businesses are high-growth in their nature, however, are typically smaller in enterprise value – making them less attractive to funds with deeper pools of capital seeking larger investment sizes.


Reflecting on lifecycle – typical research into the expectations of when a business requires what type of funding and when is equally skewed towards businesses based in London and the South East of England. Regional businesses tend to bootstrap for longer – apart from the physical disadvantages of being so far from the major source of the UK’s capital, this lack of investment creates further gaps in terms of wage and job growth. This cycle perpetuates a lack of awareness of the wide range of investment opportunities that exist outside London.


Adding more hurdles, it has been proven that private investors are more likely to fund an equity deal outside their head office or branch office region if government is involved as a syndicated investor or if a director has past experiences with equity finance.



Empower British Business Bank with further funds, with the ability to expand both the quantum of investment and its remit in investing these funds. Address certain State Aid restrictions (age off SME, sunset clause in EIS and VCT, re-investment of VCT returns within 18 months, inability to support SMEs on AIM other than via a placement or IPO)



In conclusion


Established as a start-up back in 2010, Mercia was founded to address the regional disparity between opportunity and capital access. Mercia is focussed exclusively on the UK, with c.120 employees and offices across the UK regions to ensure that that the requisite investment team is within two hours from prospective and existing investments. Mercia has backed over 1,000 businesses over the last five years and, today, Mercia has a portfolio of c.460 companies, 89% of which are based outside of London and the South East of England. Mercia has seen the positive impact of regional BBB funds, EIS and VCT and as a proactive regionally focused specialist asset manager is working hard to get more capital into the UK regions. Governments have created an impressive arsenal to foster innovation and entrepreneurship in the UK with initiatives such as R&D tax credits, EMI options, regional funds, EIS and VCT capital sources. However, it is not without its challenges supporting equity gap businesses, with State Aid feeling like it ties both hands behind the backs of investors and investees alike. Mercia seeks the continuation of these remarkable interventions, with modest optimisation in large part delivered through the removal of State Aid constraints. Mercia has also provided data and made contributions to both the British Private Equity & Venture Capital Association (BVCA) and Venture Capital Trust Association (VCTA) submissions to the Treasury Select Committee inquiry into Venture Capital.



June 2022

[1] BVCA QR Oct 2020