There was a time when one or more venture capital (VC) funds were available to serve entrepreneurs in Northeastern Minnesota and Northwestern Wisconsin. Over the years, however, they have disappeared. Various entities, including banks, offer other forms of financing, but the market currently lacks a key VC player.
A group of Twin Cities financial pros are working to establish a new fund. They have launched Hill Capital Corp. to invest in small companies and support entrepreneurs. Their startup has an historical twist: It reflects the name and goals of James J. Hill, known as “The Empire Builder,” who in 1893 completed the Great Northern Railway, creating a transportation corridor from St. Paul to Seattle. He reflected the mettle of many entrepreneurs, beginning his work life as a clerk and attaining success through hard work.
“He went from owning a couple of boats to owning an empire. We want to be part of that type of growth,” said Patrick Donohue, president and chief executive at Hill Capital. “It’s something we’re very passionate about.”
Hill Capital initially will operate in Minnesota, western Wisconsin and eastern North Dakota. Eventually, it will expand to operate along the entire Empire Builder corridor. The entity is legally structured as a business development company. According to its offering circular, it is raising money by selling stock to interested parties. The price is $1,000 per share with a low minimum purchase – just one unit. The total capital sought is $10 million to $20 million.
The concept emerged about five years ago, Donohue said. Kevin Spreng, who then chaired the board at the James J. Hill Reference Library in St. Paul, initialized a formal conversation with interested peers. He now chairs the Hill Capital board.
“We discussed how to create a fund that would be a long term economic engine,” Donohue said, confessing, “Very early on, we felt it was a long shot.” But after significant study, plans for a launch came together. “We determined how to bring partners into place,” he said.
A final decision to proceed was made in 2014. Initial investors were entrepreneurs, board members and the historic James J. Hill Reference Library (which does business as the James J. Hill Center). Austin Bogestad was hired to join Donohue, and the two-person staff, assisted by interns, prepared to move the project forward. Documents were filed with the Securities and Exchange Commission (SEC) this February.
Meeting legal requirements for the offering was a challenge, but not one that was insurmountable, given Hill Capital’s leadership. Donohue interned for Morgan Stanley while attending college and built an online brokerage platform following graduation. He then wrote equity research reports for seven years. In 2005, he moved into investment banking, working with initial public offerings and private placements. Donohue has helped author and execute numerous capital formation plans – from start-ups to equity growth capital. He and Bogestad are being assisted by experienced hands-on members of the Hill Capital board, who will continue their involvement as the project advances.
“Patrick’s a reputable guy and knows finance extremely well,” said APEX President and CEO Brian Hanson, who has worked with Donohue for more than a decade on a variety of projects.
Spreading the word
With planning and paperwork behind them, Donohue and Bogestad have advanced to the next step – the EmpireBuilder Investor Roadshow. They made two presentations in Duluth on May 6 to explain the mission and vision of Hill Capital, address the funding gap faced by owners of smaller companies and show how a regional investment fund can assist entrepreneurs and other financiers.
“To have these individuals come up and express interest is somewhat refreshing,” said Todd Fedora, president of U.S. Bank for Duluth and Northeastern Minnesota, who attended a presentation.
He said bankers consider VC funds a valuable asset when financing deals are being assembled. There’s a growing need for organizations to provide bridge funding, Fedora and Hanson stressed, because many of today’s new companies are “asset light” – they engage in work involving information stored on readily available computing and storage systems, which lack much liquidation value as collateral. That’s a departure from the past, when companies often collateralized their loans with high-value land, buildings and heavy equipment.
“This is definitely happening in our region and we have to find ways to bridge that gap,” Hanson said.
Unlike some VC funds, Hill Capital will allocate just 10 percent for early-stage firms. Investments will generally be $100,000 or less. Ninety percent will be designated toward helping proven later-stage firms that have strong expansion plans. Typical investments will range from $250,000 to $1 million. The fund usually will work in conjunction with several financing partners.
“Breakout growth is our theme,” Donohue said, following the lead of James J. Hill, the Empire Builder.
Beyond Hill Capital, typical borrowers might also receive loans from one or more banks plus groups such as the Entrepreneur Fund and Northland Foundation.
“What we’ll really be looking for is somebody to take the lead, such as a community bank that knows the customer very well. They will be important partners in the underwriting process, although Hill Capital will also do its own due diligence,” Donohue explained.
Investors in Hill Capital are encouraged to play a key role after venture capital is provided by lending their expertise to borrowers.
“We’ll welcome participation by investors who want to get involved – bankers, accountants, economic developers and others. They will have the opportunity to group together as an advisory board. We see a lot of value in our shareholders being part of the process. This is designed to be very collaborative with all of our shareholders,” Donohue said.
After Hill Capital sells a sufficient number of shares, the next step will be to seek development deals. Quite likely, investors will help to scout for strong investment prospects.
After capital is distributed, Donohue envisions repayment will occur in a variety of ways. In most cases, it will include common equity, preferred equity or warrants that can be exchanged for equity. Some repayment will also involve the return of principal plus interest.
“Our goal is to be self-sustaining, although there is no guarantee of anything,” he said. And for Hill Capital investors, the goal is an attractive return.
A side goal of the project is to support the James J. Hill Center in St. Paul, which will be the headquarters of Hill Capital Corp. It will receive annual payments in exchange for office and presentation space, along with providing reference materials for entrepreneurs. Keeping the library healthy will ensure entrepreneurs receive trustworthy information long into the future, Donohue said, offering a reliable alternative to some of the information online.