Peloton Cycle's indoor studio in the Chelsea neighborhood of Manhattan resembles New York City's other fashionably overdesigned cycling studios. The reception area is all clean lines, bright woods, polished metal, neutral colors. There's an artisanal coffee bar. The place is packed with people of minimal body fat. There's a gorgeous locker room, Malin+Goetz toiletries, and fluffy towels.
In the cycling studio itself, though, the similarities end. It's more television production soundstage than athletic space. Spotlights hang from black, ceiling-mounted pipes above the 60 stationary bikes. Cameras are aimed from various points on the studio walls, and there's one gliding along a semicircular track. The bicycles are, naturally, bespoke. A monitor on the front of each one displays its rider's cadence (pedal revolutions per minute) and power output, and the resistance on the bike wheel. It also shows a leaderboard, ranking everyone in the room as he or she tries to keep up with today's instructors, Christian Vande Velde and George Hincapie, retired American professional cyclists who between them have 28 Tour de France appearances. They're cycling royalty, and they're about to kick butt.
Yet the biggest difference between this Peloton class and every other indoor cycling class is that in addition to kicking the 60 butts of those in the room, Vande Velde and Hincapie are about to kick those of more than 360 people who are livestreaming the class on 22-inch, HD, custom-built, Android-based, touchscreen tablets affixed to their home-based Peloton bikes. Later, video of the class will be uploaded to the cloud, where it will join the thousands of other classes that reside there, waiting to be downloaded to the more than 30,000 Peloton home bikes that have already been sold in 22 countries.
The Manhattan location is a microcosm of what CEO and co-founder John Foley believes will earn Peloton Interactive a $10 billion valuation in the next five years. Peloton is actually five businesses. It's a bike manufacturer; it's a luxury gym, packed with riders for nearly every class at $30 for a single session; it's a production studio; it's a retailer with 14 shops, where you can buy the $1,995 bike, private-label athletic apparel, shoes, and accessories; and, most important, it's a video producer. Peloton bike buyers pay $39 a month for a minimum of one year to access as many live or taped Peloton classes as they want.
Peloton is also selling celebrity. Besides world-renowned road racers like Vande Velde and Hincapie, stars of the indoor cycling world, plucked from competitors like SoulCycle and Flywheel, teach the classes. Much like celebrity DJs, such cycling instructors as Robin Arzon, Nicole Meline, and Jenn Sherman have social media campaigns and thousands of devoted followers. Many of them are more famous among Peloton riders than Hincapie and Vande Velde. The majority of the instructors make six-figure salaries for teaching 10 to 15 classes a week. Getting access to classes taught by these studio athletes is propelling people to opt for a Peloton bike--and pay the subscription fee--instead of buying some simple, much cheaper stationary bike or other piece of home fitness equipment.
Peloton's riders aren't necessarily cyclists; they are cultish. One hundred sixty of them came to New York for a special home-rider event at the studio in February (and 1,800 have RSVP'd for another one in May). "Last week, we had four people posting photos of the Peloton logo tattoos they'd just gotten," says Foley, a fit 5-foot-9 man with ruddy cheeks, intense green eyes, light brown, closely cropped hair, and a nearly perpetual impish grin. "That's four in one week."
Boutique fitness fans like Peloton's are powering the fastest-growing segment of the health-club industry. Unlike standard gyms, boutique studios--like Pure Barre, YogaWorks, SoulCycle, Flywheel, and Barry's Bootcamp--specialize in a single activity. From 2013 to 2014, the last year for which data is available, membership in boutique fitness studios grew from 22 percent to 28 percent of the gym-going public, faster than the overall gym membership growth of just 1.5 percent.
That growth should sustain additional boutiques, like Peloton. Foley's strategic advantage, though, is that he has extended the boutique studio by webcasting its classes. As is the case with an online college course, the number of potential students for each class is unlimited, yet only a single prof is needed to teach it. That's one reason the company is on track to generate more than $150 million in revenue in 2016, three times its 2015 total. It became profitable in December 2015, just 24 months after its first bike was delivered.
This scalability is what underwrites Foley's unicorn dreams and has him believing that Peloton will sell a million bikes in the next five years. Even if it sells just a quarter of that number, that would represent almost $500 million in sales and produce $117 million in annual-subscription revenue at current rates. The company's potential is even more impressive when you consider its origin story. Peloton has defied every aspect of the prevailing startup ethos of doing it fast and lean, buying off the shelf, partnering, and, above all, custom-building as little as possible. Instead, Foley has managed to break every rule and make every startup stumble possible and still create a revenue machine.
The concept for Peloton came to Foley, who's now 45, in late 2011, when he was president of e-commerce at Barnes & Noble. He and his wife, Jill, both loved studio fitness classes, but their two kids and jobs made getting to the gym increasingly difficult. At work, as he tried to build a competitive challenge to Amazon, he realized that, although hardware was important, what really drove people's actions was the content that could be delivered over that hardware--be it a bike or a Nook. "Going to a SoulCycle class or a Flywheel class, in the locker room after, everyone is talking about how much they like the instructor or the music," Foley says. "No one ever talks about the hardware."
He began to wonder, "Could you build a distributed technology platform that will allow you to consume that content"--those studio cycling classes--"at home?"
The indoor cycling craze was cranking by then. SoulCycle, which launched in 2006, had just opened its eighth studio. (It now has 57 in eight markets.) Flywheel Sports had opened its eighth location. Flywheel, co-founded by Ruth Zukerman in 2010, was the first to incorporate a monitor that offered precise metrics on how much resistance the bike had on its wheel. It also pioneered the gamification of indoor cycling with its TorqBoard--a screen that ranks riders' performance. (It now has 36 studios in 12 markets.) Smaller, one-off cycling studios were sprouting up around the country.
About this time, Tom Cortese, now COO of Peloton, showed up at Foley's house, expecting drinks, dinner, and conversation between two friends and former colleagues; they'd worked together at Barry Diller's IAC, where Foley ran Evite and Pronto.com. At some point, though, Foley spun his laptop around to face Cortese, and there was one word on the screen. "It just said 'Peloton,'" says Cortese. "And he's like, 'We're going to build this.' And I said, 'What are you talking about?'"
Foley made the first of many Peloton pitches. "He said there's an opening here for technology guys to make a real play and build a product that makes it easier for folks to get access to the best instructors, no matter where they live, at any time, no matter how busy their schedules are," says Cortese. Foley sketched out the vision--an indoor bike with a monitor that could stream cycling classes. Cortese was selling the company he was then running, and agreed to come on board.
Foley, an alum of Harvard Business School, tapped into his extensive network and raised $350,000 from a dozen angel investors within a couple of months, and added $50,000 of his own money. Foley and Cortese rented a small office in Manhattan, Cortese moved into it, and Foley ramped up fundraising while continuing his job at Barnes & Noble with, he says, then-CEO William Lynch's knowledge. They also started investigating which tablets and bikes would work best for their purposes, and whose content they could stream.
The assumption that they could buy off-the-shelf cycles got derailed pretty quickly. There wasn't a bike on the market that met their needs. There were no "sexy bikes in the market at all, let alone one that could track your metrics and power," Foley says. Nor could they find a monitor big enough, or sweatproof enough, for their plan. They also realized, he adds, that they faced risks in partnering with a bike or tablet maker. "There's too much exposure--they could change something and it would render our product irrelevant or antiquated," he says.
Meanwhile, Foley approached Flywheel about joining forces. The idea was that Peloton would continue building out its business model, but become part of Flywheel and use its classes as content. The deal fell through. (Zukerman says neither she nor current management was involved in any talks with Peloton. Foley says he dealt with the company's prior chairman, David Seldin, and former CEO, Jay Galluzzo.)
After a short search, Foley decided that Peloton would design and build its own bike and tablet to meet his specifications. He needed both pieces of equipment to last for years, with minimal maintenance, in a customer's home. This, not surprisingly, hindered Foley's fundraising efforts. "It was amazing how hard it was to raise money" when investors learned Peloton was going to custom-build the bike and tablet, he says. "They were like, 'The degree of difficulty on this thing is a 10 out of 10. And you don't even know if there's a market for this product.'"
It was true that Foley could offer no research to convince potential investors that a market existed. He was relying on his gut instinct, which told him that there had to be lots of people like him out there who would love to own what he was building. Ironically, more than a few VCs told him, "I'm not going to invest, but when you build this, let me know, because I want to buy one," he says.
Foley uncovered something surprising about early-stage investors. "These venture capitalists, I've learned, aren't risk takers, which is kind of a funny reality," he says. "It's made me a little bit of a bitter human being." (He estimates that he has personally pitched several thousand investors over the past five years.)
To conserve the angel funding, Peloton's first four staffers didn't take salaries, just equity. In May 2012, those employees were Foley, who'd left Barnes & Noble, Cortese, Graham Stanton, now president, a former IAC colleague of Foley's who had invested $25,000 in the seed round, and Yony Feng, now CTO. Feng was in a U-Haul driving his worldly possessions to a new job at Ticketfly in San Francisco when someone both he and Foley knew reached him and explained the Peloton idea. Feng recalls that after hearing the pitch, "I said to myself, oh, there's probably a good chance I'm gonna do this. Should I even unpack?"
They threw some of their precious angel money at designer Eric Villency, who had helped SoulCycle design its bike, to come up with a 3-D mockup of Peloton's concept. Feng, meanwhile, was working to prove they could integrate a bike with a touchscreen Android tablet running an app to upload metrics from the bike while livestreaming video. He cobbled together the interface using a Schwinn stationary bike with some attached sensors connected to a stripped-down electronics board running his Android app, routed to a computer monitor rigged to the bike's front. "The tricky part was to get the Android talking to the Schwinn," says Feng. "At that time, Android wasn't designed to talk to a bike in any way, shape, or form."
The founders built a curtained-off "studio" in their tiny office and began streaming "classes" (taught by Feng and shot by Cortese, with Foley as the student) to a bike with a monitor located on the other side of the office. Then they tried livestreaming a class to a bike set up in the living room of one of their apartments. It wasn't pretty, but by August 2012, they had a prototype to show investors.
By the end of 2012, Foley had completed a $3.5 million Series A round. The plan, he says, was to raise awareness and more money on Kickstarter by producing a great video showing the new bike in action. The prototype bike arrived in early June 2013. It was horrible. "It wobbled," recalls Foley. "A lot." Wobbly or not, they shot their Kickstarter video, taking care to keep the bike still. "For a Kickstarter video, you can fake it, so we faked it," says Foley. "It was a high-anxiety time when you're trying to sell something that isn't ready to be sold." Eventually, the manufacturer fixed the production model by reinforcing the legs.
The founders also had another looming challenge: Once the bikes landed in customers' homes, they needed cycling classes taught by popular instructors to stream to them. Neither Flywheel nor SoulCycle was interested in a partnership. (SoulCycle CEO Melanie Whelan declined to comment.) Instead, Peloton did what sports teams do and went into the free-agent market. The company posted ads for the "best instructors in the world" on its Facebook page and got the word out through the founders' personal contacts. Not long afterward, Jenn Sherman, a popular instructor, showed up and, says Foley, "told us our search was over." She's been with the company ever since. Another star, Marion Roaman, joined later, and they started taping classes in the curtained-off studio in the middle of the tiny office.
They also started interviewing other instructors, which was more than a bit of a distraction for the team of software engineers working in the same space. "The class area fit six bikes," recalls Roaman, who is credited as a co-founder and was at Peloton from 2013 until June 2015. "I would run auditions out of there, and these guys were working at their desks, and these girls are coming in wearing sports bras and music is blaring." These days, though, Cortese says he finds it difficult to work in an office without music blasting somewhere.
The June 2013 Kickstarter campaign hit the modest financial goal that Peloton had set for it, $250,000, but the company sold only 188 bikes at $1,500 apiece. That wasn't a complete disaster, but close enough. "In our mind's eye, we thought this thing was so cool that there would be crazy demand," says Foley. The price turned out to be too high for Kickstarter's investors. "We realized that this wasn't going to be one of those things that explodes and all the VCs will wire money tomorrow," he says. "It was like, OK, we're back to the drawing board. We're going to have to market this thing the old-fashioned way and get the product in front of consumers."
Foley, the e-commerce expert, realized he was going to have to go the brick-and-mortar route. "We figured this was going to be something that the consumer would want to touch," he says. That's when one of the company's new staffers suggested a pop-up store. Foley sent him out to scout locations, imagining something near a transportation hub like Grand Central Terminal or Penn Station, to catch the monied suburbanites who didn't have easy access to cycling studios. The employee came back with a different idea--the Mall at Short Hills, in Millburn, New Jersey. Foley had never heard of the place, but it was a luxury mall in a community full of monied suburbanites--the ones getting off those trains from Penn Station.
Peloton opened the store in November 2013 with a few new, nonwobbly bikes. Luxury malls had another feature that was attractive as well: a trained labor pool. To run the store, Peloton got "two 24-year-old guys we hired out of Abercrombie & Fitch," Foley recalls. The location was a recently shuttered Reed Krakoff store, and to save money, Peloton retained the beautiful interior the leather goods company had created. The pop-up cost just $10,000 to prepare. "We determined that if we sold one bike a day, we'd be successful," says Foley. "And then all of a sudden, we were selling five a day."
But Peloton was not delivering five bikes a day, nor would it for quite some time. It's lone supplier, in Taiwan, had a 90-to-120-day lead time. "We thought that if we told people 90 days, they might not go for it," says Foley. So the salespeople told customers delivery would take 30 days, a technique he sheepishly calls "overpromising and underdelivering." Customers began flooding the website and social media with complaints about the delays, and a lack of communication about when, exactly, that expensive piece of hardware was going to show up. "Turns out people were fine with [90 to 120 days]," says Foley, who, like his co-founders, had no luxury retail experience. "They just wanted to know." The company now has two plants making the bikes, and delivery times are in line with sales promises, says Foley.
Meanwhile, Feng was trying to build a broadcast-quality television studio in the company's tiny office space, a task that--do you sense a theme here?--none of the founders knew anything about. "There's a lot of Googling," Feng says, explaining how he learned what he needed to know. "There's a lot of chatting with people who do video stuff. There's a lot of attending conferences. There's a lot of reading books as well." He also relied heavily on the technicians who were building out the lighting, cameras, and editing bay. "They had installed a million of these things, and they were asking, 'What do you want?' And we were like, 'Well, what should we want?' And they said, 'Well, you can do this, this, and this.' There was a lot of tweaking along the way." The first bikes were (finally) delivered to customers (mostly friends and family) in January 2014, and classes were streamed to those home-based monitors from the tiny office studio until May 2014, when the Chelsea studio opened.
But the arrival of those bikes in people's homes came with another set of problems. At first, Peloton, like any e-tailer, relied exclusively on third-party companies to deliver and set up the bikes. And it wasn't going smoothly. "Often, that third-party fulfillment partner doesn't have the human resources that meet the level of Peloton-caliber people," says Foley.
The solution? Launch a global logistics division--despite having no expertise in logistics, of course. The team solved the problem by researching the logistics sector for best practices ("I don't know how people did this before the internet," says Foley), which led to their finding delivery-driver temp agencies and buying mapping software to optimize delivery routes. "It's basic general entrepreneurship, which is studying what other people are doing. In a cool way, you have second-mover advantage and you can do things better if you are paying attention," says Foley. The company started a trial run last winter in the New York metropolitan area. It leased three Mercedes Sprinter vans, wrapped them with Peloton's logo, and contracted with drivers, "25-year-old handsome guys in Peloton polo shirts and approved shoes, pants, and hats--like a UPS driver meets an Apple Genius Bar technologist."
One factor enabling Peloton to overcome these various calamities and get profitable quickly is that the companies that could have been competitors in this new home-based, on-demand space, SoulCycle and Flywheel, allowed it to happen. SoulCycle filed to go public last year and its S-1 filing mentions the desire to build a digital, at-home service, but it has yet to offer one. The company also sells an at-home bike, priced at $2,200, though it is not a connected device. Currently, SoulCycle's app can be used only to book and buy classes. Flywheel's app allows users to monitor their metrics and buy classes, and Zukerman says the company is looking into creating an at-home experience, but she wouldn't offer any additional information.
Peloton, by comparison, has begun offering unlimited live and on-demand classes for $13 a month via an app, so users can get the videos without the bike. The company will soon make some sample classes available to premium members of the social and fitness data aggregation app Strava, which is a favorite of serious road cyclists, thus extending the brand into a new demographic. Peloton's international expansion strategy includes not just the existing multinational bike deliveries, but classes streamed in different languages as well. It is creating a commercial version of the bike that can stand up to much more intense usage, and will sell it to gyms and high-end hotels (many of which already bought the consumer version of the bike). A new commercial division will work with B2B customers and maintain the high-usage fleet of bikes. "The demand for that is absolutely huge," says Foley.
Step aerobics was once in high demand too, as were other fitness fads. Still, Bruce Cohen, head of private equity and strategy practice at management consulting firm Kurt Salmon, and author of its recent boutique fitness report, "Sweating Small," thinks studio cycling has legs. "In the near term, we're seeing both coasts growing rapidly" in demand for boutique fitness studios, he says, "and we're seeing that growth continue with key metro areas and secondary markets as well. So we think there's lots of runway over the next few years."
With an IPO planned next year, Foley is counting on that rising popularity. In preparation, he's getting set to unveil his next product (another connected home fitness device he won't name), has recently hired a new CMO (Lori Marcus, formerly chief brand officer at Keurig Green Mountain), plans to hire a new CFO with a public-company background, and wants to add a customer-experience boss. He's even considering a shift in the executive team members' future roles, including his own. He realizes the team's scrappy DIY approach has its limits, and going public would definitely expose them.
"Right now, the board and senior team and I think I'm the guy for the next couple of years, but that's not a fait accompli," Foley says. "I think I've proved that I'm the guy for the first four years, but can I be the guy for the next four years? We do need to mature and bring in types of people who can manage a multibillion-dollar, publicly traded company. Our team doesn't have that experience right now."
Not that that's stopped them so far.