After three years of planning, networking and raising $10 million, Patrick Donohue has launched his “patient” venture fund that seeks to help close the small-business capital gap.

“The genesis of this with other founders was to invest in Main Street and small business at the intersection of capital and community,” Donohue, a managing partner of Hill Capital Corp., said last week. “We have closed on three investments, $2.35 million in three entrepreneurial companies, from a $10 million fund. The aspiration is to build this in our region and take it from there.”

Donohue, 43, spent nearly a decade as research director and then investment banking director at Northland Securities. As he witnessed the few remaining regional securities firms chase larger and larger transactions, and venture firms demand exorbitant terms for capital, Donohue concluded there was a need for a venture firm dedicated to helping privately held businesses of $3 million to $10 million in revenue grow as long as seven years without giving up significant ownership or being forced to sell.

“We want to help these businesses, which are at or close to profitability, to professionalize,” said Nick Ehret, 33, a former KPMG CPA and independent small-business consultant. “But they often don’t have the capital to hire the key executive … or the sales and marketing people or technology. Bankers tend to make only working capital loans or secured asset-based loans. And traditional angel investors or venture-capital firms demand huge returns and often majority control of the company.

“They typically put in $1 and want $100 back,” Donohue said. “They invest in 10 companies and eight make nothing, so they have to make it all on one or two.”

Another Hill Capital founder, Kevin Spreng, a veteran Fredrikson & Byron attorney who works with entrepreneurs, has called this approach regional “economic barn raising.”

The Hill Capital crew has taken an organic approach by hosting “Empire Builders” open events and participating in as many as 200 other networking meetings and programs such as 1 Million Cups, SOAR Conference for Women, GrowMN and Entrepreneurs Rally. Through these programs they have engaged hundreds and connected to many Upper Midwest communities that rail baron James J. Hill connected with the Great Northern Railroad in the late 1800s.

Donohue and Ehret have devised an “equity based note,” a fixed rate plus a performance bonus if the company performs, without demanding personal assets, majority control or the firstborn child as collateral.

“What I have realized with two decades in finance is that people fail to take one bite at a time, to do all of the small things systematically,” Donohue said. “They want their business to be financially stable, but have no granular plan to make it happen. They want an exit at a superior [price], yet don’t understand something as simple as the company’s cash balance on a daily basis. They are highly prone to stumble …

“I have lived it. I have been … an ‘expert’ in finance, yet not knowing where my cash was going in my personal life or the businesses I started. That all changed when times got skinny. Nothing like buying a home, starting a family or embarking on a business venture with your own capital that focuses you to start tracking every dollar. I started small, observing dollar flows, and now it is a weekly habit.”

Hill Capital also provides free consulting services through 35 veteran “ambassadors.” It reviewed 124 businesses that led to six offers, three investments and a number of prospects. The fund intends by year-end 2021 to make 12 investments in growth companies.

The inaugural investments are in:

• Oakdale’s Cashé Software, which provides back-office software that helps 375 personal-care and other human-service firms and agencies automate, including employee timecards, billing and reporting.

• Minneapolis-based Warecorp, which provides software engineering, consulting and content management to more than three dozen area companies.

• Rochester-based GoRout, which provides customized software to hundreds of high school and college football teams.