A wake-up call for startup funding in Canada

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Stewart Schaefer, chief executive of Sleep Country Canada Holdings Inc., oversees a retail network of 287 stores, so there are lots of things that could keep him up at night, but raising capital isn’t one.

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The company covers most of its expenses with cash. If ever there isn’t enough money in the bank to cover an investment opportunity, or to ride out some temporary volatility, Schaefer has a $360-million credit facility from which he can draw.

For perspective, that cushion is 14 times larger than the $25 million Sleep Country used to purchase 52 per cent of Hush Blankets Inc. last month.  Yet Schaefer is still marked by his early days in the mattress business three decades ago, when he launched Dormez-Vous Sleep Centers Inc. in Montreal with “zero” money, “begging the banks for a line credit,” while working seven days a week to get his company off the ground.

“You never take that scared entrepreneur out of your belly,” he said.

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Thanks to Schaefer, who sold Dormez-Vous to Sleep Country in 2005, a couple of young entrepreneurs from Toronto are now working on scaling the country’s latest entry in the highly competitive sleep industry without having to stress about money. On Nov. 23, Sleep Country announced that it had spent $500,000 to take a 25-per-cent stake in Sleepout Inc., a direct-to-consumer startup that solicited more than 3,000 orders for its portable blackout curtain on Kickstarter this summer, but hasn’t yet shipped any product. 

“We’d never invested in a startup but we love investing in young, bright, passionate people,” Schaefer said in an interview. “They were going to go on Dragons’ Den,” he added, referring to the CBC television show that films entrepreneurial dreamers taking their ideas to a panel of established business leaders and investors. “I said, ‘Pause on Dragons’ Den. You’re a startup. You don’t even have inventory yet. If you are going to Dragons’ Den to find a partner, maybe we should be your partner.’”

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Sleep Country’s experiment with angel investing could be a template for maximizing the boom in entrepreneurship that occurred during the pandemic.

Canada has been falling behind because of chronically weak productivity

Carolyn Wilkins

Monthly additions to Canada’s business population averaged 16,649 between October 2020 and July 2021, according to Statistics Canada’s most recent data , compared with an average of 15,145 in 2019. If enough of those companies survive, the economy could be on the verge of a productivity boost, since new companies tend to spur both competition and innovation. Canada is in dire need of both. The Bank of Canada last month dropped its estimate of how fast the economy can grow without stoking inflation to a meagre 1.6 per cent, reflecting the central bank’s low expectations of how much gross domestic product the country’s labour pool will generate over the years ahead.

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“Canada has been falling behind because of chronically weak productivity,” Carolyn Wilkins, the former senior deputy governor at the Bank of Canada, wrote in the Financial Post last month . “We invest less in research and development and we’re slower to adopt technology than most of our peers, and we maintain impediments to trade within Canada. What does this weak performance mean for Canadian families? It means we are poorer.”

The consensus of academics who study innovation is that Canada is pretty good at creating startups, but poor at turning those fledglings into difference-makers. One of the barriers has been access to capital. The county’s financial industry is dominated by a handful of big banks that have become highly profitable by avoiding risky bets. Business lending increased about four per cent in August from a year earlier, well below pre-pandemic levels , according to Statistics Canada data. Mortgage lending, which is underwritten to a significant extent by the federal government, surged almost 10 per cent in the same month, the most since 2008.

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“Banks are pretty reluctant,” said Mark Coombs, CEO of Sleepout, adding that he and co-founder Hannah Brennen struggled to convince a lender to even give them a credit card. “They need to see things already successful before they are willing to put up a line of credit, so it became pretty clear early that was not going to be an option for us.”

Business Development Bank of Canada, a Crown corporation with an explicit mandate to back entrepreneurs and small businesses, came through with a loan that was big enough to allow Brennen and Coombs to turn their idea — a blackout curtain held in place by suction cups, making it portable — into a prototype. They decamped from Toronto and spent last winter at a rental in Lévis, Quebec, across the river from Quebec City, to get to work. “It was just the two of us in this winter Airbnb with a lockdown,” said Brennen. “It was an amazing period of no distraction. We could really get focused. It was this intense building phase.”

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The effort paid off. The lender that really came through for Brennen and Coombs was the crowd, as their Kickstarter campaign raised $300,000 in 35 days this summer. Schaefer marveled at the quality of the video they produced to sell a product that didn’t yet exist, making the decision to back Sleepout that much easier. Sleep Country could have easily designed its own blackout curtain, but Shaefer said modern business isn’t as simple as that.

“Great ideas need to be implemented by great people,” he said. “Why not do it in-house? Probably easy enough done, but I wouldn’t have had Mark and Hannah. I’m investing a little bit in these two folks.”

• Email: [email protected] | Twitter: carmichaelkevin

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