Propelling Your Company’s Value to New Heights

In this episode of The Faces of Business, Patrick E. Donohue, Managing Partner & CEO, Hill Capital Corporation, shares strategies he sees implemented that are significantly increasing company values.

In this episode of The Faces of Business, Patrick E. Donohue, Managing Partner & CEO, Hill Capital Corporation, shares strategies he sees implemented that are significantly increasing company values.

With a career that spans finance strategy, corporate development, and equity capital formation for growth companies, Patrick has been at the forefront of value improvement and financial innovation.

His work, deeply rooted in financial technology, medtech, healthtech, and more, showcases a remarkable ability to drive growth and value in diverse sectors.

Download our free business valuation guide here to understand more about business valuations and view our business valuation FAQs to answer the most common valuation questions.

At Hill Capital Corporation, Patrick has been instrumental in investing and advising companies on navigating the complex landscape of equity growth capital and advancing companies through strategic financial initiatives.

Patrick’s philosophy emphasizes the importance of hard work, integrity, and the joy of working with people you respect and admire. Patrick is also a committed community contributor, actively involved in various organizations such as Habitat for Humanity, The Girls Club of Omaha, and more, showcasing his belief in “paying-it-forward.”

Damon and Patrick are super excited to build value in today’s session. The host formally starts the show by inviting Patrick to share his journey and how he got involved today.

Do you want to know if your business is ready for your exit or what you should do to prepare? Learn this and more with our business exit assessment here.

The guest shares his good entrepreneurial background, tracing it back to his early years when he sold lemonade with his cousin and bought shares of Coca-Cola at a young age. His fascination with understanding the value of things led him to a career in finance.

Patrick reminisces about his childhood experience of learning about stocks from his father, which ignited his interest in finance and ultimately led him to pursue a career in the field. Despite initially considering a path in law, his interest in finance grew during his college years, eventually shaping his profession.

Damon inquires about Hill Capital Corporation’s current ventures.

Get the most value for your business by understanding the process and preparing for the sale with information here on our Selling a Business page.

Patrick explains that Hill Capital Corporation is an investor focused on entrepreneurial-led businesses, where the founder remains the CEO. They typically invest between half a million to a million dollars in these businesses.

Additionally, Hill Capital has built a community of around fifty-six Ambassadors who advise their portfolio companies to aid in their growth. Currently, they’re investing from a $25 million fund, having already invested in twelve portfolio companies and made fifteen investments. Patrick’s primary role involves:

Meeting with business people.
Understanding their businesses.
Ultimately selecting suitable investments to support and nurture their growth.

While digging deeper into the details of their investment, Patrick reveals Hill Capital Corporation’s diverse portfolio. He gives examples of Foreverence, a type of small company that creates custom ceramic urns, including one for Prince’s family displayed at Paisley Park, and Psychotherapy, a biotechnology company producing human liver cells with potential life-saving applications.

Damon, curious, wants Patrick to elaborate on the typical stage at which they usually invest, whether it’s pre-revenue or post-revenue.

In response, Patrick explains that Hill Capital Corporation follows a unique investment approach, distinct from traditional angel or venture capital investing. They focus on investing in mainstream businesses, such as Foreverence and Mercury Mosaics, which typically have a couple of million dollars in revenue when invested in.

These companies aim to grow to $10-20 million in revenue rather than targeting billion-dollar valuations. Their strategy seeks businesses at an inflection point, where profitability is achieved, allowing for a structured repayment model rather than relying solely on eventual exits.

Moreover, Patrick asserts that their priority is to know the founders. Assessing alignment with the company’s values is crucial, followed by evaluating the economic model of the business. They seek businesses where investing money as low as $1 can generate significant internal economics, particularly in profits and free cash flow. This flexibility contrasts with the challenges faced by entrepreneurs who may be pressured into selling their businesses prematurely due to obligations to external capital sources.

Meanwhile, Patrick talks about his recently published book, Breakout Valuation: How to Finance Your Future Today.

Impressed by the guest’s approach, Damon requests him to talk about his insights on what entrepreneurs should consider if they aim to enhance their company’s value.

In guest’s view, to propel a company’s value, entrepreneurs need to articulate a compelling vision for the future of their business. He gives insights into the “magnetic vision” that attracts others. This ability to articulate a clear and attractive vision is what sets successful founders apart, whether it’s Jeff Bezos or smaller businesses like Mercury Mosaics.

At Damon’s request, Patrick further explains that while multiples like EBIT (earnings before interest and taxes) are factual figures used in transactions, they don’t inherently drive value. Instead, the value is determined by the buyer’s vision for the business’s future growth potential. Patrick criticizes the overemphasis on multiples, urging a deeper understanding of what truly drives a company’s value.

Damon inquires about additional factors besides articulating a vision that catches Patrick’s attention when evaluating companies.

Patrick believes it is crucial to identify opportunities for business expansion during the underwriting process, citing the example of Foreverence expanding its product line to include urns for pets. Focusing on the small details can make a big difference in a company’s success. It is to optimize marketing strategies to reduce customer acquisition costs by leveraging the expertise of their network of ambassadors.

Damon transitions the conversation to asking about companies Patrick has encountered that are unexpected or unconventional.

Patrick shares an example of an unexpected company they invested in called Beam Healthcare, based in Madison, Wisconsin, which provides paid telemedicine services with a focus on specialist care. Their platform, TeamSbyBeam, offers remote access to specialized healthcare professionals. This innovation gained traction during the pandemic, facilitating better healthcare access for all.

Damon raises the topic of recent interest rate adjustments and expresses his perspective that the world has been in an artificially low-interest-rate environment for too long.

Patrick notes a significant increase in the third and fourth quarters of the previous year. He observes that while venture capital firms and banks became more conservative, Hill Capital saw a surge in companies seeking investment. Patrick shares an example of a larger company seeking funding due to tightened lines of credit from a major bank, especially in a tightening interest rate environment.

The guest is excited about the evolving capital availability for entrepreneurs in 2024. He anticipates a broader understanding of alternative forms of capital beyond traditional banking and venture capital, such as revenue-based financing and fintech solutions. Despite challenges in sectors like commercial real estate, he remains optimistic about entrepreneurs’ access to capital, emphasizing the importance of a strong business plan.

Before parting, Patrick encourages entrepreneurs to explore various forms of capital beyond traditional avenues like banks and venture capital. He suggests tapping into local economic development resources, which often have insights into available grants and incentives. However, he warns against predatory practices from specific fintech lenders, advocating for caution and encouraging entrepreneurs to establish relationships with local banks.

The show ends with Damon thanking Patrick for his time.

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Exit Your Way® provides a structured process and skilled resources to grow business value and allow business owners to leave with 2X+ more money when they are ready.

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Other websites to check out:  Cross Northwest Mergers & AcquisitionsDamon PistulkaIra BowmanService Professionals Network (SPN)Fangled TechnologiesB2B TailDenver Consulting FirmWarren ResearchStellar Insight, Now CFO, Excel Management Systems  & Project Help You Grow

• 45:27
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Damon Pistulka, Patrick E. Donohue

Damon Pistulka 00:02
All right, everyone, welcome once again to the faces of business. I’m your host, Damon Pistulka. And I am so excited for our guests today, because we have Patrick Donohue here from Hill capital. And we’re going to be talking about propelling your company’s value to new heights. Patrick, thanks for being here today.

Patrick E. Donohue 00:20
Thank you, Damon. It’s awesome to be here and share insights on building value for entrepreneurs. Yeah,

Damon Pistulka 00:25
it’s awesome. It’s awesome, man. And we got introduced and I was like, wow, I had to have Patrick on because value is something we talk about a lot. Talk about a lot on the show, we talk a lot about in our work and with just in general people, so Exactly.

Patrick E. Donohue 00:40
Well, I’ve listened to a number of your your shows and so forth, and you do a huge service to entrepreneurs. So first off, thank you. And I know, people touch upon what it takes to build value in a number of different ways throughout your show. So happy we can dive in today. Yeah,

Damon Pistulka 00:54
it’s gonna be awesome. It’s gonna be awesome. So Patrick, we always like to start out by letting the guest tell us kind of how they got into doing what they’re doing today.

Patrick E. Donohue 01:05
Yeah. So I have an entrepreneurial background. But ironically, I probably couldn’t articulate that up until about 10 or 15 years ago. But I started as an entrepreneur, and I just actually was looking at this and thinking about that. But I actually still keep my picture of selling lemonade when I was four years old with my, my cousin Chad. And so as they say, that’s where it started. And I went on to love figuring out what things are valued, why they’re valued. So I bought 10 shares of Coca Cola when I was 10 years old. And it kind of set me on this path of collecting baseball cards and doing the typical things kids do. And that’s really propelled me into my career in finance, I’ve always really find fascinating why things are valued the way they are.

Damon Pistulka 01:58
Yeah, yeah. So what spurred you to buy Coca Cola at 10 years old? Oh,

Patrick E. Donohue 02:06
this is a good story. Damon, this is fun. This is a fun one to start with. So my I had older brothers and sisters. And as a kid, I had noticed that my my, my dad gave them money for Christmas. And my dad was the very typical, like, very conservative, like we were one of the last families to have a deed or not even a DVD or VHS player. Yeah. So of course, as a kid, I wanted a Nintendo or Sega gaming system. I actually was an Atari back then sorry, I didn’t even back in atari. And so that’s what I was asking for, for Christmas, while the year before hand got one. So I was wise enough at 10 years old to say, Hey, how about you just give me money for Christmas so that I could go buy my own gaming system? And that my dad probably wisely said, No, I will not give you cash. But I will help you understand what these things are called stocks. And we’ll work together to buy your some of your first shares of of, of stock. And so that’s how it all started. So as a young person, of course, what do you do? You drink Coca Cola? And you’re like, can I own this? And so that’s where it started. And that’s why I sat down with my dad and learned about stocks and bought my 10 shares of Coca Cola as young person.

Damon Pistulka 03:26
Yeah, yeah. 10 chairs. That’s awesome. Yeah. So growing up, then did you know that you wanted to be in finance all the time? Or kind of how, what’s your path? How did it go?

Patrick E. Donohue 03:39
Well, I always thought I wanted to be an attorney, because my father was an attorney, but unfortunately, did pass away a few days after I turned 13. And so I kind of you know, as I started to do explore law, I realized law was not what the show la law was all about. It was a lot of reading and doing a lot of things that weren’t so fun. So that’s actually when I started to think about like, Oh, I could, you know, be a stockbroker. You know, that was kind of the term back then. I mean, today, it’s people are Wealth Advisors and so forth. But that’s when I went off to college at Creighton University that would kind of put me on the path to study finance and took me to where I am today. We’re sure going down memory lane. This is good, Damon. Well, I’ll

Damon Pistulka 04:29
tell you, there’s one thing if people haven’t haven’t, Creighton is cool, because that’s that’s an is that in Omaha right outside Omaha?

Patrick E. Donohue 04:37
Yeah, it’s right out. Right outside Omaha just strictly straight south of where you grew up. And when school?

Damon Pistulka 04:45
Yeah, yeah, and last time I was Omaha is there for the College World Series. What an experience.

Patrick E. Donohue 04:51
Yes, yes. Oh,

Damon Pistulka 04:54
my goodness. I digress a little though, because that’s just that I that was it was so Chuck good experience for me. And I encourage anyone if you’re if you’re a baseball fan college baseball that has had great time, right? Well,

Patrick E. Donohue 05:06
I, I know you coach Little League. And you know, and so that’s an awfully special place in the hearts of a lot of, you know, little league baseball coaches and baseball players is the College World Series in Omaha. It’s really second to none. So

Damon Pistulka 05:22
yeah, yeah, it is. It’s a cool place. So growing up in finance, and growing up and going to college for finance, what audit school then kind of how did you progress into doing what you’re doing today? Sure,

Patrick E. Donohue 05:37
well, out of college, I went to work for a firm that would today be called a fintech. We didn’t use that term back then. But I helped start one of the first online brokerage platforms. Having gone to school in Omaha, we would see, Joe, the founder of AmeriTrade will come in and talk in our classes all the time. And we did. So I always found that fascinating. So I had the opportunity to help start an online brokerage firm in my early days and kind of be an intrapreneur. I mean, I was hired as an employee, but the brokerage firm was building an online brokerage platform. And so that was a heck of a lot of fun. But that was a bit of a flash in the pan. Because e trade and Ameritrade and others were really the 800 pound gorillas, yeah, and hard to compete with. But then I ended up going to affirm and writing research on public companies, so sell side analysts writing research on public companies. And that was a lot of fun. And so that’s what really kind of took me into ultimately investment banking and doing IPOs capital formation advisory valuation work for a lot of public and private companies.

Damon Pistulka 06:48
Yeah, yeah. Now, in Hill capital a day, what are you guys doing with hell? Capital? What are you guys typically doing there?

Patrick E. Donohue 06:57
Sure. Hill Capital Corporation is an investment fund, we are an investing in primarily entrepreneurial led businesses, where the the founder is still the CEO. And we invest half a million to a million dollars in that business. And then we also have a community of which is round 56 Ambassadors today who are advisors to us in our portfolio companies to help those businesses grow. We’re currently investing out of fun to which is a $25 million investment fund. And in to date, we have 12 portfolio companies and have made 15 investments. So we’ve done some follow on investment work as well. And so that is my bread and butter. That’s what I do day in and day out is meet with entrepreneurs and get to know their businesses and ultimately, you know, find a couple that are a good fit for both of us and invest in and help those businesses grow.

Damon Pistulka 07:52
Yeah, yeah. So what are you seeing as, as some of the cool things that these entrepreneurs are bringing to the world?

Patrick E. Donohue 08:01
Well, what’s really fun about our portfolio at Hill Capital Corporation is that we have a diverse portfolio. We invest in a number of different types of businesses, we don’t go to Marketing, we’re an industry expert in any one thing. So we’ve invested in companies like forever since that makes CUSTOM CERAMIC urns. And they got national news. They’ve gotten national news a number of times, but big news when they made the customer earn for Prince’s family. When he passed away, they replicated Paisley Park as an urn, which is on display today at Paisley Park. That for prints. And so they’ve done a number of celebrities and a number of cars for a car enthusiast and dogs for dog enthusiast. And so that’s a very unique company. And Pete sari and his team are very unique entrepreneurs that are building this business. So stuff like that, that we’ve invested in that, you know, a little easier to understand. And then we’ve also invested in companies like psychotherapy, that is producing human liver cells, and it’s a biotechnology out of Rochester, Minnesota, the Mayo Clinic and other large investors are investors in psychotherapy as well, but they are producing human liver cells and, you know, their work is can literally save lives, because liver is one of the last organs that it’s pretty much lights out when somebody has an issue with the liver. And so their work is very fundamental to being able to do drug discovery and a number of other things that the liver is critical for. And so that’s been a really fun investment as well, to see them to build and grow. So yeah,

Damon Pistulka 09:51
yeah. Well, and like you said, it is a real matchmaking kind of experience. for you to find the right investments, so you talk to a lot of companies and, and and there are a lot that that, for whatever reason don’t really fit. So let’s talk about that a little bit, because that’s one of the things that I think a lot of a lot of entrepreneurs, especially startup entrepreneurs, really don’t understand what you as that kind of investor coming in, really is looking for. So, yes, it’s an I know, it’s frustrating of them. It’s, it takes a lot of time for you to educate people like this. So what point are you actually are starting an investment? Is it pre revenue usually is that they’ve got some revenue, or where are you usually looking to invest? Well,

Patrick E. Donohue 10:54
our fund at Hill Capital Corporation is a bit unique. We are not doing traditional angel or venture capital investing, we’re investing in more mainstream type of businesses, like I mentioned, for reverence in another company is like mercury mosaics that makes handmade custom tile. And so I share all that as background, because the type of businesses that we’re investing in Daymond typically have a couple million in revenue, when we invest in, they’re looking to grow to 10 million in revenue, or 20 million in revenue, they’re not necessarily gunning for 100 million or a billion dollars. Now, some, like psycho therapies are on that path and could be, but most of our portfolio are companies like mercury mosaics that are looking to really take the next step to just simply double and triple revenue in the years to come. And we’re able to do that, Damon, because we have a bit of a unique structure to how we make our investments. We invest in businesses where we put $1 in and we look to get two to $3 back. And the reason why that’s really important is because we’re investing in businesses that are typically at an inflection point where they’ve got products and services in the marketplace, and they’re achieving profitability. So we set it up where we can get paid back over time. So we don’t have to wait for an exit of that business someday. Because that’s the challenge with a lot of the traditional Angel and venture capital models where they really need that entrepreneur to sell the business for cash in five years after they make their investment. And that’s where you see challenges happen for entrepreneurs that don’t really fully understand and appreciate what they’ve signed up for. So to your question, I really encourage entrepreneurs to get to understand and ask the types of questions that you are in getting to know who their potential investors are to make sure there’s an alignment of what that capital looks like. To make sure it’s, it’s synced up.

Damon Pistulka 12:55
Yeah, that’s why I was asking some of the questions because I know if someone’s listening here today, that is looking for this kind of thing. Just that I just don’t know what to ask, if you haven’t been through the process a bunch, you just don’t know what to ask. And one of the things that you said is, what is the exit timeline for your investment? Or what do you want your investment to do? You know, and, and the way that you structure the payback, that’s real important to have your investment to make sure that that works for you. All that’s critical when you’re when you’re an entrepreneur, trying to find an investor, and when you’re an investor trying to find the right company.

Patrick E. Donohue 13:37
Exactly. And that’s, that was actually a big part of why I wrote the book breakout valuation, because in the book I talk about, and encourage entrepreneurs to ask those types of questions, including questions like, Where does their money come from? And what ties do they have and hooks back to their LPs in their investors, because that can often dictate the type of terms that the that the investor can make. So it I can tell many stories around that. But it’s very, very important for entrepreneurs to do as much due diligence on their investors, as their investors are going to do on them. Yeah,

Damon Pistulka 14:11
yeah. We were down a slippery slope of situations there. So when when people come to you and looking for investment, what’s the most common thing that says, We just can’t do it?

Patrick E. Donohue 14:31
Well, what we’re really underwriting for is the people. And so we really lean into getting to know the founders in the the majority owners of the business, because when we invest, we become business partners. And so we really want to get to know them. So a lot of times that’s what we’re looking for. So we start with the people. So we do background checks and all that type of stuff. But if they have a Anything that’s not, you know, aligned with our values and our values are right posted on our website, but they don’t have things that’s aligned, you know, that’s going to be a quick pass, then obviously, we’re getting into the economic engine, the economic model of the business and the economic engine has to make sense, we have to see where we can put $1 in, in that business can really generate, you know, five to $10 worth of economics internally in that business in the form of profits, and more importantly, free cash flow it so that all us to really to line up, and then then it would take us into doing some due diligence, of course, into the industry, so on and so forth. So we look at it differently, you know, then a lot of venture capital firms and VCs were they’re looking at like, Can this be the next billion dollar thing? Can this be a massive homerun, and they’re starting with, you know, how big is the market? At the end of the day, we’re not getting too hung up on, you know, how big is the market? It’s more can this entrepreneur really execute? And, and, you know, double and triple revenues over the next, you know, five years?

Damon Pistulka 16:03
Yeah, yeah, that’s, that’s, that’s a distinct difference, because what you’re doing is you’re making sure that the profitability of the business as you expand it will, will give you the return, rather than a lot of investors invest for the exit to give them the return they need. Exactly.

Patrick E. Donohue 16:20
So when we talk about Daymond, as we want the entrepreneurs, the founders of our portfolio companies to have optionality, that’s key. So our investment enables optionality, meaning if they want to raise additional capital, because things are going well, and they want to continue to build, they can do that. If they want to continue to build and run a lifestyle business, they can do that. If they want to hand it over to the next generation and keep running this business for 50 years, they can do that. If they want to sell their business, they can do that. That’s the big difference. And that’s where unfortunate, I’m seeing a lot entrepreneurs get hurt because they’re forced into exiting and selling their business when they may not really have wanted to, but they had no other way to provide liquidity to some external capital sources that provided them capital in the early days. Yeah,

Damon Pistulka 17:11
yeah. We got a question here from a holiday says, What’s the name of your book? Oh, sure.

Patrick E. Donohue 17:18
It is breakout valuation. And so that simple, breakout valuation, and people can learn more at breakouts. And it’s available anywhere you buy books. So

Damon Pistulka 17:29
awesome. Awesome. Well, thanks for that. Well, this is interesting what we’re talking about propelling your company companies valued to new heights, because you do talk a lot about valuation, you talk you do, you’ve done a lot of valuations on companies. So and what, and I don’t even know, I’m getting confused here, because I’m so excited that we we have valuation is such an interesting thing for me to talk with, with professionals. I do it every day and business owners because there’s such a gap in knowledge of what really is value, what is what drives value. So let’s just start there. What what do you think that entrepreneurs should be thinking about if they really want to propel their company’s value, if

Patrick E. Donohue 18:17
they really want to propel their company’s value they need to think about and be able to articulate the vision of where that business is going to go. So I talked about 19 drivers of real value in the book. But at the end of the day, to your question, the thing where people get value for the business is based on the magnetic vision. And the reason I won’t use the word, the qualifier magnetic is because it’s one thing to have a vision, but you have to communicate it in articulated in a way that attracts people to the vision. If you look back at all the big companies and all that type of stuff, we can tell a story about how that founder had a magnetic vision, Jeff Bezos, Bill Gates on down the line. And we don’t even have to talk about the big companies. I can talk about that with mercury mosaics and you know, as a custom tile manufacturer, and others that are really good at being able to articulate why their business should exist. But more important to that is where their business lives and thrives in the world in the next 10 to 20 years. That’s where the magic happens. And that’s where people get paid a breakout valuation.

Damon Pistulka 19:27
Yeah, yeah, it is. It is interesting because you get you get kind of caught in in business valuation we’re doing them all the time. You know, you’re you’re in it at a different level and different point in their business lives. But you know, you get get so tied up in the, in the numbers, right, because, yes, it’s a big part of it. But if there’s the vision, and the company is on that path, there is no doubt that that vision derives value exactly

Patrick E. Donohue 19:56
in Daymond. I grew up in the weeds. You know, my whole background is in finance. And I have the Chartered Financial Analyst designation, and I’ve done fairness opinions for public companies. And so I’m a student of the numbers. And so I always thought about companies in terms of like multiples and discounted cash flows. But a few years ago, actually none thinking about this. I was on the the manufacturing floor of mercury mosaics looking at these beautiful custom handmade tile that artisans. Literally, they’re baking the clay, they’re in glazing it by hand, and it occurred to me, I’m like, Oh, my gosh, that’s what’s creating value in that business. This business isn’t a multiple of EBITA, or cash flow, or whatever multiple you want to talk about. A multiple is a correlation. The causation is the people, the process, the vision, all these things that go into creating value in that business. And that’s where the aha moment came. That was the inspiration behind the book breakout valuation. Yeah, so

Damon Pistulka 21:07
talk about that a little bit more, because I think, you know, most people think that while the value is a multiple of the of the profitability, that’s just the way it is.

Patrick E. Donohue 21:18
So what happens is, the multiples of correlation that happens just to be the number that the number that comes out, after the calculations of when the transaction is done, and accounted for a business sells for 10 million had a million of EBIT, ah, and they say, okay, it was a 10 times EBIT a business for sale. Well, that’s just factual, that is what it is. But that’s not what caused the value. That’s not what caused it. Right? Yeah, that owner was buying that business, thinking that they could take that 1 million in EBIT and grow it to two, three 10 million someday. And so they were willing to pay 10 million at that point in time. Now, if that vision wasn’t there, or that ability to grow it from 1 million to three to 10, maybe it was only could grow up to 1 million, or 2 million or 3 million over 20 years, then they probably would have paid 3 million, it would have been a three times multiple on that business. So that is what has been really lost in translation, unfortunately, where people have become, do, I dare say, intellectually lazy when they overly talk about multiples, because we can look at multiples of all the things that have been done in that’s, that’s a bit of Mind Candy. But the real conversation is what caused the company to be purchased at that price. And that’s where it gets interesting, because at the end of the day, the buyer of that asset, is thinking about what that asset can do for them over the next 510 20 years. And that’s why you see, companies like Google paying a billion dollars for YouTube back in the day, and everybody thought it was nuts, because YouTube had next to no revenue, monetization plan, so on and so forth. And now buying YouTube for a billion dollars, looks like the biggest bargain that has ever happened in in the history of finance. And so that’s the difference because the founders of YouTube, were able to articulate, and Google and the executives of Google knew what that asset could do over time within their ecosystem. And they paid the founders that premium for YouTube back in the day, because they understood what that business could mean to them. Yeah, the difference? Yeah,

Damon Pistulka 23:39
yeah, it is, you’re right. And that happens, as you said, you have the multiple is just a is an after it is calculated after the business are sold. But to get to it. Yes, it makes a difference in maybe starting, but when he really get into the details, it can change an awful lot from there, right. And

Patrick E. Donohue 24:01
you’ve seen it many times, I’m sure in your business practice, where you’ll have more recall at Main Street businesses and so on and so forth. Like, I think about coffee roasters, because we’ve looked at a number of coffee companies over the time and so forth. And, you know, you can look up on biz buy, sell and these other things where it’s like, the average Coffee Company has sold for 2.3 times seller discretionary earnings, okay, whatever all that means. And you’ll see some that, you know, sold for two and you’ll see some that sold for four or 10, or whatever the case may be, and it’s all over. But the numbers that are reported or an average or whatever the case may be. Now there’s a difference for those who bought into and believed in the Starbucks story versus the the Sioux Falls coffee company that’s only located in Sioux Falls and as one location and as a name that doesn’t make sense outside of their geographic location. Right. So that that’s the difference of why these valuations happen in the marketplace. Yeah,

Damon Pistulka 24:57
yeah. That That’s awesome. So beyond articulating the vision, what are some of the things that when you’re looking at companies, you go, wow, that is a huge thing that we’re going to be able to help. Realize, I mean, because you just see these things and you go, wow, there’s something there that the owners may not see. Or maybe they see a little bit that you guys look at it together and go, Okay, now, this is really something.

Patrick E. Donohue 25:30
Well, I think what’s interesting for us is that many times, we’re having that conversation throughout the underwriting process. And you know, where they’ve got opportunities to expand their business. So when we first invested in forever ants, they had like little to no sales around just like urns for pets. And now it’s a whole category on on their website, and people are buying, you know, $2,500 customers for their golden retrievers, and so forth. And so we have those conversation through through underwriting. And that’s really interesting. But for us, a lot of times on the front end, we do want people to focus and not go too overboard or too quick into expanding into new product lines. So my long winded answer to your question is, a lot of times, it’s a little nuances of being able to think about and help them on the little things in their businesses that can go a long way. So for example, a lot of companies, you know, spend quite a bit of money on pay per click, or, you know, social are SEM and so forth. And so, when they’re thinking about, like marketing on search engines, you know, we’re thinking about, like, some of our ambassadors that have quite a bit of experience, you know, engaging on social media and being able to deploy strategies where they can, essentially more the customer acquisition costs for those types of companies, so they don’t have to keep, you know, feeding the Google machine and being over reliant upon that. And that’s where it gets interesting for us. Because when you see those types of things happen, and an entrepreneur, be able to optimize and to dial in, what they’re doing and why they’re doing it. That’s what gets us pretty excited because I maybe I’m just getting too old or something, Damon, but I’ve seen too many companies go belly up chasing the next big thing. Yeah, well, we get really excited when they chase the thing that’s like right in front of them and perfect. The thing that’s right in front of

Damon Pistulka 27:25
them. Yeah. Yeah. Well, that’s that’s, I mean, that’s the entrepreneurial curse in a lot of cases is, there’s something that’s really close to what you’re doing. That might be the the big thing rather than the, the shiny object over in the other field. Yes. Yeah. So as you’re, as you’re doing this, and you’re you’re talking with people, you’re out there. Just just talking with these companies? What are some of the companies that you have run across you go, I would have never thought in a million years of this kind of company?

Patrick E. Donohue 28:05
Yeah, it’s a it’s a, it’s a great question. So we invested in a company called beam healthcare that’s out of Madison, Wisconsin, that provides telemedicine services. And what was really interesting on that is that their angle is that they provide specialist services. So you think about like, when you go to a doctor go into a hospital setting, you think about like, if you need something around like cardiac or neurological, like you need to go into a very specialized facility and have that direct relationship, in beam healthcare now through their, their teams by being which any, any anybody can purchase and basically get telemedicine access, but it’s, it’s on the specialists. It’s not just about like a general doctor, they can get access to specialists and I in that is really cool. And of course, that was really fueled through the pandemic, when, you know, the regulators and everybody else had a lot of realizations where they needed to open up better access to health care for everyone. But that was really that’s been really fun to see Dr. Sergio Patel, accelerate his business plan around teams by beam and giving more people access to high quality health care, no matter where they’re located. And so that one has felt really, really good. That

Damon Pistulka 29:26
is cool. Yeah, it’s cool. And it’s a great great example of some of these. Like you said, things had to change during COVID But they really changed some things and pushed us into new directions. That helps a lot of people. Yes, very much so. Yeah, because you might not you might not have a specialist within 200 miles of your where you live if you’re in the middle of Montana or Alaska or something like that, but being able to talk to somebody over video and and they can see all the test results. You can get the same Kara are really close. Exactly

Patrick E. Donohue 30:01
right. Yeah. And it’s wonderful to see. I mean, they’ve got he’s got a number of stories of people that, who knows what would have happened? Yeah, if they hadn’t, you know, dialed into teams by being, and it’s really, really neat to see. Yeah.

Damon Pistulka 30:15
Yeah. So as your ad, so we’ve we’ve just come out or not come out of we’ve just rolled into a time when we had an interest rate adjustment. And you know, and I don’t know about you, but I think that we lived in an artificially low interest rate world for far too many a long time. I don’t care if it’s too many or whatever. But how has that really changed things?

Patrick E. Donohue 30:42
Well, one thing for us is our deal flow went through the roof in the third and fourth quarter last year. And so a lot of venture capital started to sit on the sidelines, banks, of course, clammed up, and we saw a lot of deal flow coming. And we had a number of companies, including a company that was well over 30 million in revenue, much larger than we would have ever imagined, making an investment in but they came to us because they they have a banking relationship with one of the biggest banks in the United States. But, you know, they started tightening up lines of credit and, you know, in their business was going well, they had an opportunity to expand in new markets, and they didn’t want to slow down on that. And so we were able to make an investment there. And so that’s where we’ve seen probably the biggest impact with the, you know, with with the increase of interest rates, you know, is just more people looking for money. And it just has really solidified what I talked about in the book, and what I always advise entrepreneurs on I know, you’ve talked about a number of times on your podcast, like recently with, with Don, the fractional CFO, person, but getting a line of credit when you don’t need it and getting relationships when you don’t really need them super important. I know you and Don talked a lot about that. But that is really important to have and build those relationships, because now we are in an environment where the interest rates tightened. And it has a lot of cascading effects that happened really, really quick. That decrease access to capital. Yeah,

Damon Pistulka 32:15
yeah, that’s for sure. For sure. And I can I can imagine that that is because they the lines of credit, the sizes, were definitely cut back. And also the just the sheer amount of interest payment, you know, amount of interest that you pay, reduce the amount that you’re how far your cash flow goes well, right.

Patrick E. Donohue 32:37
i That’s why I do think of it as a cascading effect. It does. It does compound, unfortunately, when these things happen. Yeah.

Damon Pistulka 32:45
So what are you excited about looking forward into 2024?

Patrick E. Donohue 32:49
What we’re really excited about looking forward to in in 2024, is really more understanding of capital that is available for entrepreneurs, I’ve been a student have been a big fan of some of these other models, like revenue based financing, and some of the early fintechs, and so forth. And they do come and they go, and it does change, and so forth. But there has been updates and new models to help people think about venture capital. And so we continue to see, you know, glimmers of hope that there’s going to be a better and broader understanding among small business owners and entrepreneurs about what type of capital is available to them. Because we still live in an environment where people either think about, like, they can get money from a bank, or they can go on Shark Tank. And the reality is, is like, those options aren’t really a good fit for a lot of our Main Street, small businesses, and they need to understand some of these other forms of capital, and how they can structure things to be able to build and to grow. So I am excited about some of the the other models out there in people that have been, you know, blogging and posting and hosting conferences around some of these other forms of capital. And I do think that our our economy is going to continue to have spots that are doing well and are are hot, you know, like AI and the technology that supports it like Microsoft and Nvidia. They’re going to continue to do well. We invest in a portfolio company where Corp that has done very well because they build on technology solutions or an NVIDIA partner. So that’s going to continue to be hot and do well. But some of the companies that are in capital intensive businesses like we talked about, that are reliant upon, you know, bank lines of credit and financing inventory, it’s going to continue to be choppy waters and then probably stating the obvious it’s going to continue to be choppy with with real estate and commercial real estate in particular. So yeah, these things come in they go but at the end of the day entrepreneurs are have access to capital if they’ve got the right business plan, and they’ve got the right things in place. And so we’re excited about that. We always love working with entrepreneurs. Yeah,

Damon Pistulka 35:08
yeah. So you talked about other forms of capital. And I don’t want to digress too far off. But but you know, when, when most business owners look at, they think it is literally a banker go out and find it an investor. So let’s just highlight a few of those that that maybe an entrepreneur should know about? Sure.

Patrick E. Donohue 35:28
So I talked about this heavily in the book, and I, and I would point people to the couple of chapters that kind of go into the details about various types and forms of capital, because that can help entrepreneurs not only save a lot of money, but it can help build a much more valuable business and make sure more money gets left in their pockets in the book, and what I share is that I would encourage all entrepreneurs to get to know like, their local economic developer, so a lot of cities, municipalities have an economic development person or a group, even big companies, like the local power company usually has somebody that’s in charge economic development, I would encourage them to look into tap into that, because oftentimes, they know where these pools of capital are that a lot of other people don’t. And it can be sometimes cheap, or even sometimes free, because it can be grant money, or various tax based incentives. I know that a lot entrepreneurs, you know, fail, you fail and looking for that and miss those golden opportunities, grant money and things with the Department of Defense, so on and so forth. There’s a lot of money there. But there are a lot of new opportunities and funds that are coming out there. The reason I hesitate there is because unfortunately, for every good one, there’s probably three or four bad actors, and you’re laughing, you’ve seen this, and I’ve seen it unfortunately, I mean, we have seen a lot of these fintechs that have really taken advantage of entrepreneurs, where it’s the new cool online lenders. And we’ve seen it where somebody went and got a loan from one of these online lenders, and they’re all in interest rates, or their cost of capital was annualized at 87%. Because the stated interest rate was something reasonable is still high, but something in the teens, but then when they piled on all the fees, and so on and so forth, when you did the math on what it actually cost them, it was mind blowing. And that’s a problem. I actually we saw a company who was doing a couple million revenue that basically went out of business because of what had started as a couple $100,000 loan from one of these online lender, players. And then, so I caution people to really, you know, be aware of that type of stuff. In be a little wary, we also have a port company that we’re looking to invest right now that went with one of these online lenders that help them facilitate an SBA loan. Well, the problem is, is that they now need to get some changes to the SBA loan, and these people won’t answer the phone, they don’t budge, and it’s a problem. And so we always encourage people to have like, local banking relationships, we’re big fans of community banks. And so I would encourage people to, you know, build relationships, even if it’s a small $10,000 loan, but have those relationships because you never know when you’re going to need them. And so maybe I’ll leave it at that I would encourage people to like, think about and explore. And if people ever have any questions, I’m always happy to share direct insights, you know, not on a live stream or something. But exactly,

Damon Pistulka 38:45
well, we, you know, it’s interesting, we, we, friend of mine, Kurt Anderson works a fair amount with manufacturing extension partnerships across the United States and, and some of the SBDC is in the economic development. I tell you, there is a lot of there are a lot of government programs or a lot of state programs that that can help you if you’re going to do some sort of expansion or new business development that can. Like you said, Every dollar helps, and some some make a pretty significant difference.

Patrick E. Donohue 39:22
Yes. And now that you say that it just came to mind of like, lean into your vertical. So I was thinking about agriculture companies when you had mentioned SBDCs, but there are a lot of eggs, specific lenders and sources of capital. So a friend of mine just started a new fund, a $50 million fund and they’re investing in companies that are AIG related, and they’re very good people. And not only that, but some of their investors are some of the top egg lenders in the nation and they can just blow open the doors to all those relationships. Yeah,

Damon Pistulka 39:51
yeah, good stuff because I think that you know, the funding is, is important at the right time for for entrepreneurs. ers if they really want to scale and I’m, I’m kind of sad in some instances, because a lot of the SAS business or that industry sector, I mean, I don’t even know if you can bootstrap anymore because everything is so you know, you gotta get the funding to grow even when you’ve got profitable revenue you can you just can’t scale fast enough without additional investment unless you got deep pockets to start with. Well,

Patrick E. Donohue 40:29
exactly, because a lot of those, you know, what look like very profitable business models rely heavily upon, you know, sales and marketing. And you know, what I’m hearing from people right now, as I was just talking to somebody that was paying $10. A click on. Yeah, right. Like, that’s expensive, fast, you know. And so every business model has its challenges, every business model needs to be capitalized. Microsoft has raised billions of dollars. I’m a big fan of Warren Buffett and Charlie Munger, may he rest in peace, Berkshire Hathaway, and even Berkshire Hathaway raises a lot of money. You know, Berkshire is sitting on over $100 billion in cash. And guess what? Every so often they do bond offerings and sell bonds for a couple billion dollars. Well, why would they do that? Because Warren is extremely smart. And he will go sell bonds and Berkshire and pay one to 2% on that, because he knows the value of having a war chest in good times. So he can, you know, profit from the challenging time. So businesses need to be properly capitalized?

Damon Pistulka 41:36
Yep. Yeah, that’s a big deal. Yep. Well, Patrick, it’s been awesome talking to you today. And I mean, just the stuff that you’ve been able to share about the magnetic vision of the owner, and different kinds of investment in talking about the way you guys are investing, or you can find investors like yourself, where you’re really trying to get your investment along the way, or investors that, you know, looking at that need, gonna need an exit to get their return on their investment, just so much good stuff there. And and then about the the vision and looking at the team and your business and why it’s just thank you. Yeah,

Patrick E. Donohue 42:15
well, thank you, it’s fun, fun to chat with you. And I know you are doing a huge service and working with people to understand how to how to get to an exit. And that’s, that’s very, very important work. Because a big reason why I wrote the book, but for the vast, vast majority of entrepreneurs, their business is their most valuable asset. And, and as I mentioned in the book, depending on what you get at an exit, it’s going to be the difference between being paid what you should have been paid in a real job, and maybe it making minimum wage for 2030 years. And so getting a big exit at the end of the day does matter. Because the people’s livelihood, you know, families rely upon that, you know, so

Damon Pistulka 42:56
yeah, that’s it. It just brings back again, why we started the business the way we did, because yeah, it’s like, we won’t just sell as is. If that’s not where you need to be, and you want to take it, take it to a different level, we can help do that. And that’s exactly like we were doing for investors we’re doing now for for private individuals and owners, because so many times if you don’t pay attention to that valuation, you go, Oh, I’d like to do that. And they, they kind of corrosively Go out and see what it’s worth, they go up, you get that gulping feeling. And then you go back and put some put some different things into it. So yes, it’s such a life changing event. And that’s what we say it’s either you come to the end with the money knowing you got the money you want out of that thing, or you come to the end with that life changing decision? Yes,

Patrick E. Donohue 43:47
very much so. And India, you can’t overstate how important it is for entrepreneurs to think about this and think about it as early as possible and to connect with experts like you. So it’s,

Damon Pistulka 43:57
it takes a while to make the changes, that’s for sure. Well, Patrick, thanks so much. Again, we have Patrick Donahue here from Hill Capital Corporation. They’re there in Minnesota, they’re investing in great companies. It’s so cool to see what you guys are doing. And really how you’re taking these companies and really allowing them scale, like you said, from that couple million to 10 million, you’re not looking for the unicorn, multibillion dollar exit or anything like that, and really helping, you know, these are, these are real people you’re able to help and the size of businesses that you’re doing it everybody’s real, but you know, I mean, they’re, they’re, they’re rolling up their sleeves and doing it and that’s awesome.

Patrick E. Donohue 44:37
Exactly. That’s why I get up every morning, super excited to work with Mercedes and Sir Zhu and Pete and all the entrepreneurs in our portfolio companies and get to new meet new entrepreneurs. So yeah,

Damon Pistulka 44:50
thanks so much. Well, again, Thanks, Patrick, for being here today. Thanks, everyone. For listening. I’d nacer Thanks for saying hello. I didn’t get you earlier, but and thanks. everyone that was listening, if you didn’t comment, hey, go back to the beginning. If you didn’t hear this thing from the beginning and listen to Patrick, he’s got a lot of great things about if you want to understand value from understand what investors are looking for, and all that kind of things for entrepreneurs. Patrick, thanks so much. hang out for a moment after we get off the air and we’ll finish up. That

Patrick E. Donohue 45:22
sounds good. Thank you, Damon. You bet

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