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Sweet Kiddles is a new concept in center-based childcare. Unlike traditional centers where parents must commit to fixed full- or part-time schedules, Sweet Kiddles’ flexible scheduling allows families to use the center by the hour or by the day, full or part time. There are no long-term commitments, although reservations are required, especially during the busiest times. The centers are open later in the evening than most centers in the area (9 p.m. Monday–Thursday, 11 p.m. Friday) and on Saturdays (9 a.m.–11 p.m.). The centers prioritize quality of care and cleanliness and are staffed with teachers who use a proprietary curriculum to create an educational environment. Customers pay a significant premium for convenience—as much as $13 an hour for infant care versus $4 an hour or less for full-time care at nearby traditional centers.

Sweet Kiddles has two centers in the Cleveland suburbs. The first has been open two years; the second is almost a year old and approaching operational breakeven—about the same timeline as the first center. The team expects to open a new center later this month and plans to open two to four in 2015.

The Question:

Sweet Kiddles founder and CEO Andrea Kimmel (MBA 2003) presents this case study query to HBS alumni and faculty: “The team has an aggressive growth timeline, but financing that growth is a challenge. (Center one, a ground-up build, cost a little over $400,000 to break even. Center two, an empty childcare center the company remodeled, is expected to cost about $200,000 to break even.) The sector is not of interest to venture capital or many angels. The company is too small for private equity. There is not enough of a track record of cash flow for banks. Financing purely out of cash flow would slow growth significantly. How do we go about finding the financing that we need to expand?”

The Answers:

I have started and operated three iterations of childcare companies going back 25 years. We encountered the same issues. We addressed the upfront center cost issue by getting a one-time financial commitment from local employers whose staff would use our center. We would locate in the same building or very near a large employer to facilitate ease of use by their employees. The benefit to the employer was staff retention and recruiting. We would also solicit a very attractive rent abatement package from the office building/landlord. The benefit to the landlord was an additional amenity to retain their existing tenants and to better market vacant space to prospective tenants. The employer and landlord contributions would help defray enough of the upfront construction and other costs to make the centers profitable more quickly.
— Bob Poulin (MBA 1985)

The premium in the hourly rates is well deserved, but you are giving too much value away by not covering fixed/setup costs. I believe the source of funds to finance the expansion is in your pricing model.

Using fractional jet ownership as a pricing model, you can try a tiered pricing structure. Option 1: Refundable deposit paid up front plus a loyalty discount. Option 2: Equity participation (noncontrolling stake) plus volume discounts. Option 3: Combination of 1 and 2 plus surge pricing premiums (à la Uber).
— Arun Sethuraman (GMP 16, 2014)

Angel investors could be a good fit if you can tap either friends and family or local institutional angels. Although most large banks might not be interested, there may be a small regional bank that likes the mission and wants to be associated with the brand. Perhaps a deal could be struck where discounted services or brand association might benefit the local lender. Finally, given the business strategy of no long-term commitments, I wonder if the centers could be sold to or subsidized by local large employers that would want the service available to their employees as a benefit. Even some partial corporate funding could then be sold to prospective investors as a way to kick-start things.
— HBS Senior Lecturer Jeff Bussgang

I do like the idea of offering an upfront prepay deal. Like your business, mine (different industry) has been month to month instead of a contract like the rest of my industry, but we’d still offer prepay discounts, and a small portion of people will choose that model—even though it’s not our core value proposition. It also gave us cash up front.
— Paul Sims (MBA 2002)

Have you thought about trying to crowdfund and targeting prospective beneficiaries (neighborhood parents of infants) of the center? Maybe throw in incentives for higher commitments like X hours of credits, VIP parking, five free birthday parties, etc. You could even launch a few simultaneous campaigns varied by neighborhood as a way to test the market and perhaps even foster friendly competition (i.e., whoever reaches the threshold first will get the next center).
— Tom Leung (MBA 2003)

Consider a subscription model for center usage. You have the variable time slot idea with the hourly, daily, part-time rate, and you have multiple locations, so have people sign up for monthly or longer subscriptions to use the service. This becomes deferred revenue and gets recognized as it’s used, but the cash flow is up front.
— Gary Ambrosino (MBA 1988)

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