PROFIT 500 - Canada's fastest growing companies

It’s past noon at a west-end Toronto daycare centre run by Kids & Company Ltd. Round-faced Ashley, just 14 months, gazes shyly at the other infants in her playroom, not quite sure where Mommy is but determined not to be scared. In another room, lined with shelves of colourful toys, half a dozen children are settling down on tiny cots to sleep off lunch. Two-year-old Angelo, who has just moved up to the big kids’ room, misses the bars of the crib in which he used to nap here, and wonders, not for the first time, if growing up is all it’s cracked up to be.

Like it or not, Kids & Co. is all about growth. The “teachers” in its daycare centres, all early childhood education specialists, are committed to the growth and development of their more than 1,000 charges. And at head office in Markham, Ont., founders Victoria Sopik and Jennifer Nashmi are equally committed to the growth of their six-year-old company. Like most proud parents, they delight in their baby’s progress so far — providing accessible, quality daycare for the employees of Canada’s largest companies, and recently venturing out of its Toronto base to establish new centres in London, Ont. and Calgary.

It’s a remarkable feat for a company that has broken new ground by turning one of the world’s least glamorous businesses into a B-to-B play. But president and CEO Sopik thinks her firm has actually been underachieving. “We’ve never looked at this as a small business,” she says. “Our vision was to build a $50-million company. It’s been slower than we would have liked, but we think we’re halfway there.”

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Most companies would kill for this kind of underperformance. For the 12 months ended March 31, 2008, Kids & Co. posted sales of $13.7 million, almost twice that of the previous year. The company’s five-year growth rate of 12,639% ranks it No. 1 on this year’s PROFIT 100, but what’s more important is that its biggest growth may lie ahead.

Of course, that’s the beauty of Sopik’s B-to-B model. When your clients are national organizations such as AGF, BP and CIBC, they become the building blocks that can transform a local business into a national giant. Kids & Co. sells its services as an employee benefit and a key talent-retention tool, which means companies with a national footprint are eager to extend these benefits to their employees across the country. As a result, Sopik expects revenue to double again over the next year as the company “tops up” enrolment at its recently launched centres and opens new ones in Toronto, Halifax, Montreal, Edmonton and Vancouver, and two more in booming Calgary.

But there’s a cost to this sort of magic-beanstalk growth: Kids & Co. has yet to make a profit. So far, a patient group of angel investors has supplied the capital the company needs to grow. (Each new centre requires an up-front investment of about $500,000, and most need 12 to 18 months to break even.) Sopik has been promising black ink for a few years now, but this year she’s confident it’s really going to happen.

It’s all about scale, she says: with 21 centres, Kids & Co. has finally achieved the mass to ensure that opening four or five new centres a year will no longer erase the company’s profits. And that will make the two founders breathe much more easily: “We wanted an entrepreneurial adventure,” explains Sopik, “but not so adventurous as to risk everything.”

For Sopik, a 44-year-old mother of eight (six are boys), the adventure began 27 years ago, when she indulged her lifelong love of children by founding a day camp in east-end Toronto. Having worked as a day-camp counsellor, she thought she could do better. “It was a great experience for me to start a business and learn about all the things I had to know, like hiring people,” she says. A few years later, as a young (and busy) mother, she started a daycare service operating inside Toronto public schools. She built that company for 15 years, learning to manage operations with hyper-efficiency while providing quality care. But public daycare services in Ontario are prohibited from operating for profit, and Sopik wasn’t able to make money when she sold it.

Meanwhile, public daycare centres couldn’t begin to meet the demand from working parents — waiting lists are still the rule in most Canadian cities. Sopik figured she’d found a better model when she read about a few upstart businesses in the U.S. that were selling backup daycare to companies as an employee benefit. With the support of corporate clients, she figured Canada could have its first national daycare chain.

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In January 2002, Sopik shared her vision with Nashmi, a chartered accountant in the high-tech field (and a mother of three) who had managed the books for Sopik’s previous daycare on her maternity leave. Nashmi shared Sopik’s excitement, and they started preparing a business plan. By quizzing HR staff at big Toronto companies, Sopik confirmed they were eager to offer access to child care as an employee perk.

But Sopik and Nashmi soon realized that providing only backup daycare, mainly for parents whose nannies don’t show up, is an unpredictable way to pay the bills. So they devised the model they use today — running full-service daycare centres, open only to employees of corporate clients. Firms today pay a $5,000 to $10,000 annual membership fee and can choose to subsidize the parents’ fees, which average $1,000 a month.

While Nashmi set up systems for the new company, Sopik was selling corporate Canada on her idea. Since no one had ever offered such a service before, she found herself educating prospects before she could start selling. Eventually, however, the job got easer. “Once we get a couple,” she says, “everyone else wants to get in.” The client list now includes 30 law firms, four of the Big Six banks, all Big Four accounting firms and multinationals such as Coca-Cola and Procter & Gamble.

Kids & Co. opened its first centre, in downtown Toronto, in July 2002. But its plan was to build daycare centres all over the city so parents could stash their kids close to work or close to home. Finding the banks more willing to buy the service than to supply capital, Nashmi and Sopik looked for deep-pocketed investors. They struck gold in the husband of a former roommate of Sopik’s, who comes from a successful business family.

He and other members of his family have now anted up through 10 rounds of financing — cutting Sopik’s and Nashmi’s 50/50 ownership to a combined 26%. But the partners have no regrets about this dilution.

Nor do they regret the firm’s history of unprofitability. Last year, Kids & Co. posted a seven-figure loss, which Sopik and Nashmi blame on their continued building boom, as well as increasing investment in head office. As Kids & Co. grows, it’s building a deeper managerial structure to retain a focus on quality child care. Basic standards, such as teacher/student ratios, are set by the province, but Kids & Co. goes further, providing daily reports on each child’s activities, regular teacher interviews and an open-door policy so that parents can talk with area managers about their child’s care. Sopik also continually visits the sites, inviting parents to call her if they have any concerns.

Why be so over the top about service quality? Beyond Sopik’s concern for the welfare of her charges, she knows Kids & Co. can’t afford to make mistakes. Its dependence on a few dozen national clients makes it particularly vulnerable to bad word of mouth; just a few unhappy parents at one Kids & Co. location could jeopardize a huge contract. “Our program is designed to keep people happy,” says Sopik. “We understand what parents care about.”

The cornerstone of Kids & Co.’s service push is quality staff — it strives to hire and keep the best child-care workers. For instance, the firm uses its growth to create career opportunities in an industry known for dead-end jobs. “Our philosophy is not to hire anyone in a management position from outside the organization,” Sopik says.

But growth has raised some problems. Last year, the Canadian Union of Public Employees targeted Kids & Co., telling employees that the company was “expanding rapidly, while claiming not to have the financial means to pay their employees a fair wage.” After signing up about 120 workers in the Toronto area, the union threatened a strike last fall. With arbitration, the two sides inked a three-year contract; the wages and benefits won by CUPE have also been granted to staff at the non-unionized centres. Sopik notes that growth companies can be sitting ducks for unions: “When you start an entrepreneurial organization, there are always inconsistencies.”

Meanwhile, Kids & Co. is diversifying its product line. Besides full-time and backup daycare, it has introduced a backup service for boomers caring for elderly parents. (It’s outsourced to Markham, Ont.-based First Health Care, which uses on-call nurses and support workers.) In the future, Sopik would like to see the company add more specialized services, such as care for special-needs children. But for now, she says, “full-time child care is 80% of the company.”

The lead investor and chairman of Kids & Co., whom PROFIT agreed not to name, has played a key role in overseeing the firm’s progress. “I’ve been heavily involved all the way through,” he says. “We’ve had our moments, but we’re committed to the company, and as these things go, it’s been a pretty incredible growth trajectory.” But given that the company has not yet produced profits, PROFIT asked if he was looking forward to seeing some earnings and maybe even dividends from his investment. “Our aim is to build a very big Canadian daycare company, and we will organize the capital to make that happen,” he said. “If I wanted dividends, I’d buy BCE.”

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