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BizCast 44: Hill Capital’s Patrick Donahue on investing in local businesses

Episode 44

Hill Capital’s Patric Donahue, Investing in Local Small business

About BizCast Greater La Crosse

We bring you news from the business community. From startups to experienced problem solvers, you’ll get in-depth insight on the challenges and opportunities of doing business in Greater La Crosse. Our show is a collaboration between and BizNews Greater La Crosse ( ).

Full Transcript [ generated by AI]

Patrick Donahue: [00:00:00] It’s really helping think about how do you build value in that business?

Patrick Donahue: Because value equals freedom and it empowers choice for the entrepreneurs. That’s a really key piece to the whole equation.

Vicki Markussen: Welcome to BizCast Greater La Crosse, a weekly podcast from BizNews. We bring you the news from the business community. I am your host and founder, Vicki Markussen, and we have a special guest today, Patrick Donahue. He is with Hill Capital. So Hill Capital, I’m going to paraphrase it, and I, of course, want you, Patrick, to go into far more detail.

Vicki Markussen: So Hill Capital is what a lot of businesses want, which is? Access to capital, also known as funding. In your words, how do you describe what Hill Capital does?

Patrick Donahue: Hill Capital invests directly into private businesses. We are investing half a million to a million dollars in supporting those [00:01:00] businesses in their next journey of growth.

Patrick Donahue: And we look to really support the business owner and operator of that business. We’re always working with the founders of those businesses to support them in their journey.

Vicki Markussen: So a lot of these companies, I assume are already established, are they in the concept mode? Where are they typically when they.

Vicki Markussen: contact

Patrick Donahue: you. Our portfolio companies are all established businesses. Typically they’re doing a couple million dollars in revenue and they have stalled out. So they’re trying to figure out how to take it to the next level to be a five or a 10 million revenue business. We have invested in some earlier.

Patrick Donahue: companies, but that is when they already have a product or service that has a a need in the marketplace and they need additional capital to go get those products and services on further into the marketplace. We don’t invest in what would people would traditionally call startups [00:02:00] just because the ecosystem for startups in our opinion is really healthy.

Patrick Donahue: There are a lot of accelerator programs and. things available for them. So for example good friends of ours, our generator, which was founded out of Madison, Wisconsin, and now has programs throughout the United States. If somebody is really early stage, we would point them to some of those accelerator programs.

Patrick Donahue: Yeah. So

Vicki Markussen: just to explain to the people that are listening who may not be familiar. So you have businesses that have. And there’s a lot of resources out there in our local area. It might be the Small Business Development Center. It might be WIBC some of the economic development organizations, counties, they all have tools that businesses can use to help them start up.

Vicki Markussen: And so they’re starting up, they’re working through all of those kinks. And as. You have said they just hit a point where either their sales have plateaued, or is this also the case where they say, we see a new market that we [00:03:00] could reach, but we don’t have the funds to upscale to add employees or do things of that nature or research.

Vicki Markussen: And so we need funding to help us get to that next level. Is that where you play a

Patrick Donahue: role? That is exactly correct, Vicki. So a great example is we just invested in Mercury Mosaics and Tile and founded by Mercedes Austin and Mercedes is an artist, and she has been building her business for 19 years, makes beautiful handmade custom tile, and she’s gotten her business to a certain level, but now she needs to get it to an even larger level to be able to scale up because.

Patrick Donahue: It’s hard for a lot of people to maybe realize this, but even when a business is doing a couple million dollars in sales, it doesn’t mean cashflow is all that strong. Profitability at those levels can be really hard. And so a lot of business owners realize that they need to take it to the next level to get to five to 10 million to really get to the level of [00:04:00] profitability.

Patrick Donahue: And make sure they have a strong, sustainable business. And it’s a real challenge. And a lot of people find themselves doing a million, couple million dollars in revenue, and they plateau out because they need to hire more skilled workers or executives to join their team, but they don’t have enough cashflow to really.

Patrick Donahue: So it’s a tough balancing act for a lot of entrepreneurs that are at that inflection point where they’ve been around for a while are doing pretty good, but they’re not doing well enough that they can really afford to do the things they need to do to make sure they’ve got a business that is really building long term value

Vicki Markussen: and some of it, too, is so they might say I need to invest in It might be like production equipment or something that helps them scale and produce more.

Vicki Markussen: And there’s a risk there for a traditional bank to say, okay, this is a new area for you. So [00:05:00] we are only going to fund you to a certain level. And so it’s. Explain why Hill Capital or another investment firm versus just going to a financial institution and getting a loan.

Patrick Donahue: Great question. So the vast majority of our investment is going to into a business so they can hire people and to spend money on sales and marketing.

Patrick Donahue: Bankers are not able to really lend. against that. They’re able to land on real estate or buying equipment or more physical things that have what they would call collateral value. But when a business owner needs to be able to hire people they’re not able to get that money from a traditional loan in large part.

Patrick Donahue: And so that’s where we really come into play. Because when you look at a business like Mercury Mosaics she needs more people to help her launch her new line called the Mosaic Candy Shop, which are these beautiful handmade mosaic kits that people can do [00:06:00] at home. So she needs to hire designers and she needs to be able to do some R& D to develop this new product line to bring to the marketplace.

Patrick Donahue: That is not something that a traditional loan would really be able to provide Mercedes for her business. Now the other part of it too, is that, Mercedes has been building her business for 19 years. And so there’s also some, reluctancy about if you sell equity or what does that look like if you bring in a venture capital firm, but venture capital Firms are not going in and investing in businesses that are making tile in large part.

Patrick Donahue: They need the stuff that can grow to a hundred million or a billion dollars, and that’s not the businesses that are in on Alaska and lacrosse and Winona the businesses that are on our main streets are the businesses that are doing a couple million and can grow to, 10, 20 million and be nice businesses in our backyard.

Patrick Donahue: And that’s where our. [00:07:00] Our bread and butter is that the companies that we’re working with day in and day out.

Vicki Markussen: So I might be over paraphrasing here. So correct me if I’m saying this wrong. So financial institutions say, okay, if sadly, if this business fails, what are the assets there? What are those things that could be sold that we can recoup some of our dollars to reduce the risk on the financial?

Vicki Markussen: And so how I think I’m hearing you say is your funding can allow for the people piece that if the business folds, there isn’t an asset there that the bank can recoup on. Is that a good way to paraphrase what you had said?

Patrick Donahue: That is exactly correct. And so not only will bank, foreclose on the assets of a business, but 99 percent of loans are also personally guaranteed. And so then they would also collect on personal assets. And so for entrepreneurs like Mercedes and for Adele that owns babies on [00:08:00] Broadway, another one of our portfolio companies, when their businesses get to a certain level and now they’re having to, bring in, substantial capital, hundreds of thousands of dollars, if not well over a million dollars, that’s super scary to be able to have to put their personal guarantee on stuff to the extent that it’s even available.

Patrick Donahue: Cause that’s stuff that would really upend their lives if things didn’t go well, whereas Hill Capital, we can take the risk that, if a, if something happens in a market and a business doesn’t do well, because we have a portfolio of businesses, we can be able to take that type of risk.

Patrick Donahue: So we don’t. People are not personally guaranteeing anything with us. We’re not looking for collateral on, on traditional assets and so on and so forth, like a bank does. And that, and the reality is, a bank is charging, these days around 10%, but historically, three to 12%.

Patrick Donahue: And so they just don’t have enough, frankly, enough economic, they can’t afford big defaults. And so there’s a lot of dynamics that [00:09:00] happen in the marketplace and you’ve got it spot on, Vicki, on how you frame this up. And

Vicki Markussen: so the other thing that happens, so it’s my understanding, so you have a business that wants to grow.

Vicki Markussen: The bank says we can lend this much based off of your plan and what we see as the possible income and the assets. And so you are a form of gap funding to say, okay, here’s what’s left for this. dream to become reality. Is that a correct way to paraphrase that? I

Patrick Donahue: think it’s a fair way to say it. Okay. And then

Vicki Markussen: you brought up venture capital.

Vicki Markussen: So there are degrees of funding mechanisms out there. Can you explain like where you fall? Venture capital, what are the All of the options as businesses grow from startup to these, what did you say? 100 million, a billion dollar sales companies. What does that look like from funding, from a funding standpoint?

Patrick Donahue: Yeah, it’s a great question, Vicki. And I wish more people [00:10:00] would ask this question because it’s the heart of the matters of why our local economies are struggling with our, in my opinion. I’m supporting our small midsize businesses because this issue is not really widely understood, let alone talked about so businesses when they think about the type of money that’s available, they either think of being able to get a loan from a bank.

Patrick Donahue: Or going on shark tank and selling stock for equity. And for a lot of business owners it’s a conundrum because a bank can only lend so much. It like we just talked about, they need certain assets. And so that’s kind of limited on what’s available there. Now you go to the extreme other side of the equation to.

Patrick Donahue: Something like going on Shark Tank and bringing on, friends and family or equity investors are also known as angel investors and to be able to give up equity is difficult and expensive, but it, the [00:11:00] problem is, and what we have found is that it comes with consequences that is not fully understood by the business owner and the entrepreneur, namely when they bring in an equity investor, they really need to have a plan to sell the business for cash.

Patrick Donahue: Like. In five to seven years, that’s a problem. And that’s why a lot of businesses in our local communities get flipped because they’ll bring in equity investors that need a return at some point in time. And they need to sell that business for cash. And that’s why a lot of businesses in our communities are getting sold to private equity firms and so on and so forth.

Patrick Donahue: So they can provide a return to. shareholders, these equity investors in these businesses at Hill Capital Corporation. Our value add in this ecosystem is that we have designed an investment that allows us to take equity like risk, but we can get paid back over time. It’s not a traditional loan. It’s not set up the way you would think about [00:12:00] principal and interest.

Patrick Donahue: We have a lot of flexibility, but it allows a business to achieve greater levels of profitability and to utilize that free cashflow to pay us back over time. So at the end of the day, Vicky, what’s really important for entrepreneurs to think about is they’re starting and building their business. They need to think about if they want to own and control their business.

Patrick Donahue: For five years, or maybe they want to create something that they’re control for 20 years or to create a family health business, those are really important considerations on what to think about and how to think about structuring outside capital to come in the business, to make sure that it provides the growth that the business needs to be successful, but it doesn’t limit.

Patrick Donahue: the business owner and reduce their choices and what they can do with that business long term. And so it’s actually why I wrote a book that just came out called Breakout Valuation. I talk about these things in depth about capital matching and making sure that entrepreneurs [00:13:00] are really aware of the ecosystem of where capital is available and how to make sure it’s structured correctly to meet the objectives of the entrepreneurs so they don’t get fleeced out of their businesses.

Patrick Donahue: You’re

Vicki Markussen: listening to Patrick Donahue with Hill Capital. We’re talking about funding for businesses, particularly like I like to call them the mom and pop shops, the main street businesses, the local businesses. So a lot of times people think of business investors and they think. They’re out just to make money.

Vicki Markussen: But it sounds like Hill Capital really has a different approach. And can you explain why it

Patrick Donahue: does? As you can probably hear in the passion of my voice, entrepreneurship is near and dear to my heart and it is without all of our stakeholders in Hill Capital Corporation. So investors the people that are putting up the money, it’s actually coming from individuals, the money that we’re investing in the businesses, and we have a number of people that are involved that our current [00:14:00] multi generation family health business owners themselves.

Patrick Donahue: And so they know and appreciate and understand the conundrums that the entrepreneur space that we invest in and they understand the journey. And we understand how to think through. Balancing the need to bring in outside capital with the ability to grow that business. And so we are very interested in supporting entrepreneurs in their journey.

Patrick Donahue: And the key thing with us, Vicki, is, as an investment fund, we can only invest. In so many businesses in a given year, but we white glove all the relationships with entrepreneurs, and that’s why we do things like supporting local economic development groups and events with sponsorship. We do things like host our own events, like Empire Builders, which we just had a few weeks ago.

Patrick Donahue: We do a number of things where we can invite entrepreneurs into events. And to give them resources and to help them connect. You mentioned a [00:15:00] lot of wonderful resources in some of your opening remarks. We’re trying to be part of that ecosystem to help entrepreneurs wherever they’re at because it’s just super important to us as stakeholders of Hill Capital Corporation that we really understand and support entrepreneurs no matter where they’re at in their journey.

Vicki Markussen: And I think a lot of people don’t understand a fund like this isn’t one individual who is. funding this. Can you explain what a how a fund develops and what type of businesses particularly you’re looking for?

Patrick Donahue: Great question, Vicki. It’s really important for entrepreneurs. Your question is who’s behind the fund?

Patrick Donahue: We always encourage entrepreneurs to ask that if they’re looking at bringing in capital from the outside is to really understand where did that money come from? Because not all money is the same. The vast majority of investment funds out there are investing money that is coming from pension plans, in [00:16:00] foundations, and endowments.

Patrick Donahue: Now, our capital, all of our capital comes from individuals, and as I mentioned, the vast majority of them are all business owners and are active actively engaged in business themselves as entrepreneurs. It’s so That comes with a very different motivation and that’s really important because when investment fund is just investing for on behalf of a hedge fund or an endowment, they have to give that money back in a time period.

Patrick Donahue: A fund is typically structured where they have to give money back to their investors and seven to 10 years. So that’s why they need to invest in a business and to have that business sell. Get the cash back, give it back to their investors. And a lot of those investors, what they would call institutional money, like endowments and so forth, they kind of care.

Patrick Donahue: I don’t want to say they don’t care about entrepreneurs, but they’re disassociated from it. They just need to get cash back to be able to do [00:17:00] their thing at what they’re doing as an endowment or as an institutional fund, whereas our investors, they care, we’re very motivated to be able to help them support the businesses.

Patrick Donahue: And so that’s always a very important consideration for entrepreneurs to think about is who is that partner going to be? And what did they look like when times get difficult? And I said, when not, if there’s always challenges entrepreneurs are facing and they have to make sure that they’ve got good partners on the table when things get challenging and make sure that those partners.

Patrick Donahue: are not going to become somebody very different when times get tough.

Vicki Markussen: I think the other piece that is important, too, is you not only want those businesses to succeed, you want to help them in the process. So it’s not just here’s your money. Go and Fulfill your dream. It’s how do we provide other tools to make it easier to fulfill your dream?

Vicki Markussen: And so can you [00:18:00] explain some of those services that you provide to businesses you’ve decided to invest in?

Patrick Donahue: Sure, and when I think about the resources that we provide for entrepreneurs, it’s all about helping those entrepreneurs build value And that’s why I wrote the book, Breakout Valuation. It’s really helping think about how do you build value in that business?

Patrick Donahue: Because value equals freedom and it empowers choice for the entrepreneurs. That’s a really key piece to the whole equation. So we think about the resources that we can provide. It may be, helping them think through an opportunity to make an acquisition or how to make a strategic hire. Or finding customers for their business and opening new markets.

Patrick Donahue: We help with all those things. And we have 57 ambassadors that are advisors to our portfolio companies that we help bring to bear. But at the end of the day, all that work is really helping the entrepreneur in their team, create value in their [00:19:00] business. So it opens up. It empowers them with more choices long term.

Vicki Markussen: So you had said that, that building value allows for freedom and choice. How have you seen some of the companies that you have invested in understand that and gain that freedom and gain that? those choices that you describe?

Patrick Donahue: Yeah, it’s a wonderful question. So one of our first investments was in a company not too far away from lacrosse, just just to the West in Rochester, Minnesota called Go Route.

Patrick Donahue: And Mike Rowley had built a very nice business selling his devices to football teams. And Mike, basically, with our capital, had a choice of continuing to stay focused on that market and building a profitable business or to use his technology in the sports market and to enter into new markets. Now, Mike has [00:20:00] recently because of new NCAA rules has been able to go into markets like basketball and baseball, where they’re using Their technology and in game play and in game communications, and he has been able to bring in new investors and other partners to be able to take the business to the next level.

Patrick Donahue: But that’s what I mean by choices. An entrepreneur can choose to continue to have a business that’s closely held and that’s generating more profits for them because if they want to continue to run that business for 10 or 20 years, they could choose to do that or even hand it over the next generation or create an ESOP, an employee owned business.

Patrick Donahue: They could do that, or they could choose to really make the business much larger and bring in traditional venture capital, like Mike has chosen to do with GoRoute, and to really make the business much better. So that’s what I’m really speaking to when we talk about empowering choices. Because the inverse of that, [00:21:00] Vicki, is the situation that I see the vast majority of time.

Patrick Donahue: Entrepreneurs bring in, they’ll sell equity to somebody. They’ll bring in certain investors on the front end, and then they don’t have choice because they have to sell the business in five to seven years to be able to provide, a cash return to those shareholders that is expected a return on the front end.

Patrick Donahue: That’s limiting choices of entrepreneurs. So that’s why we’re trying to really help entrepreneurs gain awareness of the options that they have and to really help them think through what they’re trying to achieve long term so that they have choice in that. Limited in their choices. Yeah, there’s

Vicki Markussen: that saying that says you start a business with the end in mind the day of the day you sell it so to speak but It sounds like for some people that day may come sooner than they expect based off of how they are leveraging the value of their business, so to speak.

Vicki Markussen: My question for you is, so of course there’s going to be lacrosse area businesses going. What [00:22:00] is the process look like to get a conversation going with Hill Capital Corporation? What’s the answer?

Patrick Donahue: Yes, Vicki, it’s very simple. Reach out and we will have a conversation. So you can send me an email at patrick at hill capital corp dot com.

Patrick Donahue: That’s the easiest way. I’m also on LinkedIn and on our website. We have a button right at the front page that says apply, which is a very simple couple of questions that takes a minute to fill out. And that flags it to our team to engage immediately to set up a call to have a conversation. We’re always happy to chat with entrepreneurs and to have that initial conversation.

Vicki Markussen: So if I covered everything, my common closer question for you is what makes you passionate about what you do?

Patrick Donahue: Vicki, what makes me passionate about [00:23:00] what I do is I am really tired of seeing entrepreneurs fleece out of their businesses. It really hurts me when I see entrepreneurs that don’t have what they need or I have brought on certain partners and so forth that all of a sudden kind of dictate their strategy.

Patrick Donahue: And so why wake up every morning helping entrepreneurs, whether we invest or not. But making sure that they’re aware of the things that we’re talking about here today, Vicky, is to make sure that they have control of their business and that they’re able to build and create something of value that’s valuable to them and their family, and that they can be able to have the choices that they should be able to execute.

Patrick Donahue: As that business grows and not be fleeced out of that.

Vicki Markussen: Sounds like that aligns with a lot of businesses when they start out. That’s their vision as well. So you have been listening to BizCast Greater La Crosse. That was Patrick Donahue with Hill Capital Corporation. [00:24:00] I’m your host, Vicki Markussen. We’ll catch you next week.



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