Peloton sells happiness
By: Felix Capital
Tags: Startup, Fitness, Consumer, IPO, VC

A year ago, we were lucky to partner with Peloton, taking part in their $550m series F financing round. Today, we are thrilled to see Peloton listed on the Nasdaq, another milestone in Peloton’s already impressive journey.

Peloton today at Nasdaq

Peloton is the perfect illustration of the kind of modern brands we are aiming to back at Felix Capital. Here are 8 reasons why

An A-level team that started with a simple idea and a big vision

Peloton was founded in 2012 by John Foley and his wife, as an answer to a very simple need they were experiencing firsthand: how to continue to regularly exercise when your professional and personal life is getting busier? That’s how they came up with the idea of bringing high-energy and instructor-led group fitness into the home, making workouts more convenient and accessible. This idea then grew into a big vision of empowering people to improve their lives through fitness. To work toward that goal, John assembled a strong and complementary team composed by Hisao Kushi (Chief Legal Officer), Tom Cortese (COO), Graham Stanton, and Yony Feng. All of them are still working at Peloton in senior roles.

As consumer investors, we love backing passionate founders focusing on working on an idea that could seem narrow at the beginning but is actually growing into a large vision over time. Today the Peloton community is composed of more than 1.4m members!

A superior product and seamless software supported by a flawless logistics

Peloton is many companies in one: it is a technology company that merges physical and digital worlds, but also a media company, a product design company, a social connection company, an apparel company and a logistics company! Building such a complex model and mastering all aspects of it definitely sets Peloton apart, creating a moat vs. potential competitors.

The Peloton bike features a carbon steel frame and a 22” high-definition touchscreen with built-in stereo speakers to stream live and on-demand classes, all in a compact, 4’ by 2’ footprint. This piece of hardware is completed by a seamless software offering live and on-demand fitness class. This product is actually so well designed that most of us are putting it in our living room, a bit like the Apple iMac G3 back then…

Ally Love on her Peloton bike

A sticky community sharing the same value as this modern brand

Once you get a Peloton bike, there is a high chance that you’ll never get off it. Actually, Peloton members are doing on average 11.5 workouts per month, i.e. almost three times per week! And there are not alone: on average 6.4k members participate in each class. They are so satisfied with their experience that they can’t stop themselves promoting it, resulting in word-of-mouth referrals from loyal members being the largest sales channel for Peloton. And they become super sticky members: on average 95% of members are still active after 12 months. These are clear indicators of strong “customer love”, enabling Peloton to build a modern brand that is frequently used by a loyal community.

A group of inspiring fitness instructors producing high-quality content and leveraging their social media presence

Peloton classes are led by 29 instructors across 10 fitness and wellness disciples including cycling, running, yoga and meditation among others. These instructors are admired not only for their expertise but also for their personalities, and ability to connect with users across the screen. They have managed to build an emotional connection with their followers, leveraging their social media accounts to continue to create engagement in between two Peloton classes, and building their own communities of fans. Some of them have, like Ally Love or Cody Rigsby, have 100k+ engaged followers on Instagram.

A smart omni-channel distribution strategy aligned with their customer journey

Peloton connects directly with its customers where they are. Being conscious that buying a Peloton might require multiple touch points, the company has developed a multi-channel sales platform that includes e-commerce, inside sales and 74 showrooms. And this strategy has paid off: Over 37% of customers purchased a product or service in a different channel than where they originally engaged with Peloton. Having a network of showrooms also enables curious minds to try the Peloton experience in real life. Recently, Peloton launched a new features geolocating Peloton available in hotels so that its community could always connect and train, even when they are away on a business trip or on vacation.

A high growth trajectory supported by robust unit economics

Peloton generated $915m of revenue in 2019, doubling YoY over the past 3 years. Reaching such a scale in less than 7 years is an extraordinary trajectory, especially as the first bike sold just five years ago. And the most spectacular part is that Peloton has grown exponentially while maintaining robust unit economics: the connected fitness subscriber lifetime value per connected fitness subscriber is at $3.6k while the net customer acquisition costs is at $5 per connected fitness subscriber added. The beauty of Peloton model is that the company offset sales and marketing investments with the gross profit earned on the sale of connected fitness products, allowing for rapid payback. Thereafter, Peloton earns recurring, high-margin subscription revenue.

Peloton’s key milestones

Still scratching the surface of the global fitness market opportunity and more

We believe that this is only the beginning of Peloton history. The company isn’t addressing only the $600bn global fitness and certain categories of wellness, including meditation and yoga, spend, it is also enlarging the market as 4 out of 5 members were not in the market for home fitness equipment prior to purchasing a Peloton connected fitness product.

The company has just started to expand outside the US, starting with Canada and the UK in 2018 and then Germany in 2019, targeting a market estimated of 67m households. The opportunity to improve people’s lives through fitness is global and you can expect to see Peloton opening new countries in the near future. We could also imagine Peloton expanding into additional adjacent wellness categories by developing new connected fitness products, as well as new lifestyle consumer goods.

A very clear equity story

Last, we were impressed by the high quality of Peloton’s management team pitch to investors. They have built the perfect equity story: they have a clear vision and are continuously working on enlarging the opportunity, they perfectly understand their market and consumers and how their proposition answers to their needs, they are product-driven relentlessly optimising the user experience and, last but not least, many of the investors taking part in today’s IPO are already part of their community, as riders.

To quote John Foley’s letter, “exercising creates endorphins and endorphins make us happy. On the most basic level, Peloton sells happiness”. Felix means “happy” in Latin. That’s our way of saying that we want to back entrepreneurs who are focused on product, on making their customers happy. Felix also means “lucky” in Latin, and today we feel even more lucky to be part of Peloton journey!

Source: Data from Peloton’s S1 prospectus, dated August 27, 2019