The founders of Hill Capital Corp. are growing their "patient capital" business for small companies that need a financial infusion to grow but aren't sufficiently large or eschew investment bankers and venture capitalists.
That helps fill the "capital gap" for promising Main Street businesses.
"This is about small businesses who want to take business to the next level. This could be 15 to 20 years for us," said Nick Ehret, 36, one of two Hill Capital managing partners. "And if we can get them from $1 million to $10 million, that gives them optionality on their futures and can be a really successful outcome for us."
Hill Capital's inaugural 2020 fund of $10 million is deployed in nine concerns, from Twin Cities software creator Warecorp to Baby's on Broadway of Little Falls and St. Cloud.
It is performing well enough, up to midteen annual returns, that investors have staked $25 million on a second fund.
"The first fund was about proving our investment thesis,'' Ehret said. "The second fund is about scaling."
In 2015, Patrick Donohue, a former research and investment banking director at Northland Securities, decided to explore an alternative to transaction-based investment banking and venture capital for small businesses that needed economical growth capital. And Hill Capital was born.
Donohue, the firm's CEO, saw regional securities firms consolidating, chasing larger and larger deals. He also saw venture and private-equity firms demanding exorbitant terms for capital. He concluded there was a need for a community-integrated financier dedicated to helping businesses with $1 million to $10 million in revenue grow over the long term without giving up significant ownership through dilution or sale.
Donohue, 46, a thoughtful guy and entrepreneur himself through Inspiration Medical, has created a supportive culture for portfolio companies, investors and prospects. Hill also taps several dozen adviser-mentors and manages resource hubs and events.
Those services are mostly free to Hill Capital clients, investors, friends and prospects.
Things have come together gradually. Donohue worked the early years for little to no pay, building Hill Capital off an initial investment of $200,000.
"I've been through the 'founder's journey' — at first alone, going back to 2014-15, nights and weekends," Donohue said. "Yes, you could say there's been delayed gratification."
The lean times, he believes, also made him a better business manager and analyst.
"What I realized, in finance and as a business owner, is that people fail to take one bite at a time and operate systematically," Donohue said.
Owners may know their long-term goals but not the day-to-day operations, or don't have a plan that would make the operation financially stable.
"I'm a so-called financial expert, but even I didn't know where my cash was going in my personal life or the businesses when I started," he said. "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 forces you to start tracking every dollar."
Many investment bankers and venture investors tend to chase the next hot thing, whether tech, gambling stocks or oil. Typically, a minority of those prospects prosper over time. So they need huge returns from the winners to prosper overall.
Yet Donohue always believed something was missing if business was just about the money.
Leaders working with Hill Capital — and succeeding right now — include Sarjoo Patel of Beam Healthcare, Adelle Starin of Baby's on Broadway and Chris Dykstra, veteran CEO of Warecorp.
"I needed more access to capital to scale but didn't want to take on a partner," Starin said in a statement. "I heard so many 'nos.' I was comfortable with Hill Capital. They became advocates and advisers. We have been able to increase [sales]. The future is bright."
Part of Hill Capital's secret sauce is an "equity based note," a fixed-rate instrument plus bonus for Hill Capital if the portfolio company performs, which allows the commitment without mortgaging the house or needing to concede any ownership. That creates mutual long-term interest.
For Dykstra, that meant strategic capital that allowed Warecorp to double revenue without relinquishing significant equity in the business. Hill Capital also brought strategic insights, Dykstra said.
"I had an ally in my business," he said. "The whole thing was deliberative and congenial."
Jeanne Voigt, a veteran Twin Cities banker and entrepreneur, was a founding shareholder of Hill Capital. She saw Donohue struggle in the early years. He found several additional individual investors in 2018 who bought the vision and helped launch the first fund.
"Patrick is straightforward and kind," Voigt said. "He invests in proven companies, pulls people together and runs Hill Capital kind of like an accelerator. Some of those companies are doing really well. His idea blossomed.''