Intentional Growth #216: Bridging the Capital Gap: Growth Capital vs. Private Equity & Traditional Lending
Hitting the ceiling is not always just an emotional or energy related event. Often times business owners get to a point where growth consumes capital, and they have to choose between reducing their annual income, selling out or stalling growth.
What You Will Learn In Today's Podcast Interview
- Growth capital, versus private equity, versus commercial lending
- Biggest challenges when trying to find the right type of capital for growth
- Why the “capital gap” exists in the lower and middle market
- Why the typical options for capital, described as “Bank vs. Shark Tank,” often are too extreme for what business owners really need to grow
- The importance of owners understanding their options in order to avoid regret after a deal
- How growth capital is different than the traditional private equity structure
- What they think is “effective capital” for companies
- Why the most common way for an equity investor to get their money is to sell the business
- Why not all capital is equal for business owners
- Why they focus their mechanism on supporting business owners
- The power of having motivation outside of earning money when designing your business
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Podcast Summary
In today’s episode, Patrick and Nick dive deeply into what they refer to as “the capital gap,” why companies hit a ceiling for growth, and how to find the right source of capital to grow the value of a business.
There are mechanical issues that don’t necessarily allow traditional banks to lend (via debt) the capital needed to finance the growth. Typically, in high growth companies there may not be enough assets for the bank to take back if things go south.
The opposite end of that spectrum is to sell the business, or sell a large portion of equity, to an investor who has the capital to support the growth. However, in that case, most of the upside in value creation and future distributions goes to that new equity partner.
The emergence of growth capital is helping solve this issue. Patrick and Nick call it “efficient capital”. It bridges the gap for business owners who want to continue to grow while also keeping control of their company and reaping the benefits of that future value creation.
Patrick and Nick brought their finance and accounting backgrounds together when starting Hill Capital to create both a forward and historical looking mindset when supporting their business and investments. Before Hill Capital, Patrick co-founded equity capital markets at Northland Securities, where he was the Director of Research and Managing Director of Investment Banking. Nick spent the first part of his career as a CPA at KPMG.
At Hill Capital, they focus on lower- to mid-market financing and provide capital and expertise to small business and entrepreneurs.
Major takeaway – if growth capital is deployed correctly (into strategies that INCREASE the value of the business) it can help owners break through from a few hundred thousand dollars in EBITDA to a few million dollars. This specific range in EBITDA growth will increase the options of exits that weren’t possible (ESOPs or Private Equity) and unlock a different range of value multiples.
About the Guests:
Patrick E. Donohue, CFA is the Managing Partner and CEO at Hill Capital Corporation. He has experience in direct private and public investments, investment banking, and equity research. Co-founded equity capital markets at Northland Securities (Director of Research and Managing Director, Investment Banking). He also has a BSBA Finance from Creighton University, with honors.
Nick Ehret is a CPA, Managing Partner, and CFO at Hill Capital Corporation. He has experience in public accounting, managing a single-family office, and small business operations. Managed the audits of investment portfolios totaling $70B under management. He also has a BA from Saint John’s University, where he graduated with honors.
Quotes:
31:50 - “You know, at the end of the day, it’s really all about a return on your investment capital and so we don’t need (and I don’t expect) business owners that are going to go on to be financial wizards but there needs to be an understanding of: not all capital is equal and money costs differently depending on the sources.” - Patrick E. Donohue
34:50 - “We encourage people to look for money-on-money, right? So if somebody puts a dollar in, what are they going to expect for a dollar back?.” - Patrick E. Donohue
15:56 - “We like to say that there’s always two sorts of capital that people think about; one being the bank and the other being shark tank.” - Nick Ehret
38:46 - “We’re trying to help them go from, ‘You don’t have a lot of choices’ to ‘Now you have a lot of choices.’ That’s our fundamental goal of what we’re doing.” - Nick Ehret
Links and Resources:
LinkedIn: Hill Capital Corporation
Twitter: @HillCapitalMN
YouTube: Hill Capital Corporation
Facebook: Hill Capital Corporation
Tiny Habits: The Small Changes That Change Everything, by BJ Fogg
Atomic Habits: The life-changing million copy bestseller, by James Clear
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