Nearly seven years ago, Peloton CEO and cofounder John Foley climbed onto an indoor exercise bike and pedaled along to a video of an instructor leading a remote cycling class. The video was choppy, filmed in the back of Foley’s “busted” studio, he wrote in an email to his earliest backers. No matter. “If the idea was to re-create the intensity of an in-class experience while allowing riders to compete and benchmark against other riders,” enthused the ex-Barnes & Noble executive after his first sweaty cycle, “well let me tell you with zero trepidation ... THIS DOG CAN HUNT!”
Foley’s passion hasn’t flagged, but these days he’s trying to convince big mutual funds—and small retail investors—that a company built on a $2,245-and-up stationary bike is America’s next hot tech stock. It's a tough sell. After pricing its shares at $29 in its initial public offering on the Nasdaq exchange (ticker: PTON), which doubled its previous private market valuation, the stock opened in trading at $27, down nearly 7%. Foley controls just over 6% of the company, a position worth nearly $500 million, including stock options and an IPO bonus.
“We always assumed that going public would be a step along the way of getting to where we want to go,” Foley, 48, told Forbes. “We still believe we’re on the first out of the first inning of where we want to take this business.”
The singled-minded belief that he could build an Apple-like hardware and software empire—owners of a Peloton bike or treadmill pay a $39 month subscription to participate in live and recorded fitness classes—had to sustain him for several years of investor rejections. More than 400 institutional investors snubbed him on his early pitches. Foley kept going, convinced he could capture the loyalty of workout enthusiasts who had made SoulCycle and Flywheel, which offer in-studio cycling classes, national retail chains. Foley’s innovation: He’d offer the same group-cycling experience, but at home, where a broadcast instructor would egg on participants through the bike’s internet-connected screen.
Peloton by the Numbers
He eventually raised over $1 billion from investors like Tiger Global and Kleiner Perkins and sold 577,000 bikes and treadmills since launch. Peloton, named after the term for a pack cyclists working together in a race, generated $915 million in revenue during its fiscal year ended in June, up 110% from the prior year.
“He’s very resilient,” says Foley’s brother-in-law John Pleasants, CEO of Brava, a Silicon Valley-based startup that makes connected countertop ovens. “If you’ve heard him tell the story of Peloton, he was kicked down to the ground year after year after year. He’s got a lot of scars on his back from building this.”
Foley started his career in a Skittles factory, a world apart from the New York’s artsy Chelsea neighborhood where Peloton eventually set up its fitness studio for live broadcasts. The son of an airline pilot and a stay-at-home mom, he had worked at McDonald’s as a teen in the Florida Keys. To pay for college at Georgia Tech, he enrolled in a co-op program where he spent every other semester working for candy giant Mars in Waco, Texas. After he graduated with an industrial engineering degree in 1994, Foley transferred within the Mars company to Los Angeles, where he started working on dog food brands like Pedigree.
“I like to think that I’m not afraid of manufacturing because I worked at a midnight shift for six years in a manufacturing plant,” Foley says. “The hardware component of what we do, you know, we don’'t shy away from.”
Foley eventually got swept up in the dot-com boom, which had spread to Los Angeles from San Francisco. In 1997 he started working at Citysearch, an online city guide later bought by Ticketmaster and folded into Barry Diller’s IAC, and got his first taste of what it meant to work at a startup. After a stint at Harvard Business School, Foley returned to IAC, where he ran groups like Evite.com, Gifts.com and Pronto.com.
By 2010, he decided to change tacks and went to run Barnes & Noble’s e-commerce division, helping launch the Nook e-reader. But after a dozen years working for larger corporations, Foley wanted to be an entrepreneur of his own.
“He wants to go big,” Pleasants says of his brother-in-law, who once said he’d like to get into politics someday. “He doesn’t want to tend to something. He wants to change something or make something dramatically better.”
SoulCycle and Flywheel had started to take off in New York City, where he and his wife, Jill, who now runs Peloton’s apparel division, were living with their two kids. An avid cyclist and triathlete himself, John Foley watched as Jill planned her workouts days in advance to make sure she’d be able to reserve a place in class, no small feat as spin classes and other group cycling workouts surged in popularity. Foley realized the classes were constrained to the physical space. His idea: keep the bikes, but move the classes online, allowing for endless participants and no need for physical locations.
On a Disney cruise with the extended family, Foley and Pleasants ran laps together around the ship and talked about the idea of a virtual spin class. Pleasants would become one of the earliest angel investors in the company, later texting Foley a picture of 50 Cent to let him know he was in for $50,000. In 2012, Foley left Barnes & Noble to start Peloton, recruiting four friends (cofounders Tom Cortese, Hisao Kushi, Yony Feng and Graham Stanton) to get it off the ground.
Foley’s Fitness
About 87% of Foley’s workouts recorded on his Peloton account involve cycling.
Hardware startups are often hard to fund in Silicon Valley, but with Peloton, Foley faced a particularly steep wall of skepticism. He had to persuade investors to not only bankroll the manufacturing of a high-tech bicycle but also the creation of a fitness content studio and the social software to tie it all together. Peloton’s closest comparisons in fitness hardware, connected gadgets like GoPro (GPRO) and FitBit (FIT), had a hard time growing and eventually flamed out as public companies.
“What we see is that investors who get it, get it clear as day,” he says. “The people that don't get it scratch their heads.”
Cut off from traditional startup funding, the company turned to Kickstarter in 2013 and raised more than $300,000 from 297 backers who got perks like water bottles and reserved user names to make it easy to find friends and video chat with them while riding. Eventually institutional investors caught up, and in 2014 Peloton raised its first $10 million from investment firm Tiger Global.
“The knock at that point in time was that it was a really expensive bike,” says Hans Tung, a partner at GGV Capital, which invested in Peloton in 2017. “Whether it’s competitiveness or drive, it kept him going through his first four rounds of financing. I give him a lot of credit for believing in himself at the time.”
The price tag, while steep, proved just low enough for a group of consumers who could be persuaded to compare it to SoulCycle, which can be as much as $35 a class in major cities (nearly the cost of a Peloton monthly subscription). Its unit sales have risen between 90% and 105% every year for the last three years. The flip side of that: It has to spend heavily to reel those customers in and then keep them happy with top-notch instructors, who are paid with both salary and stock in Peloton. The company spent $324 million on marketing in its last fiscal year and lost over $195 million, largely due to its advertising and the launch of a new broadcast studio for its treadmill instructors.
“They are living by a different set of rules,” says Nautilus Inc. CEO Jim Barr, whose company manufactures equipment like fitness devices Bowflex and Schwinn exercise bikes. “I don't know if investors are going to let them continue to lose money.”
Peloton's products: a connected bike and treadmill
Courtesy of PelotonStill, Barr credits Peloton for pushing fitness makers to do more than just build bikes or treadmills. New entrants are following in Peloton’s wake. New York City-startup Mirror sells a connected full-length mirror for yoga and pilates classes, while San Francisco-based startup Tonal built an in-home resistance set that attaches to your wall. Massachusetts’ company Hydrow is even trying to remake in-home rowing to feel more like being on the water.
Peloton is competing on more than hardware, though. A growing part of its business, with over 100,000 members, is its $19.99 a month digital subscription available for users who don’t want to use its app with one of its connected machines but just want to take a yoga or running classes. “It’s funny. Internally, I happen to be one of the people in the leadership team to think that [digital subscriptions] could over time eclipse the the core connected fitness business,” Foley says. “We are going to be watering the acorn that is a pure digital business and bringing that to as many people as possible.”
While Peloton’s treadmills and bikes make up the majority of its revenue, the hardware only as good as the app and subscription that comes with it. That’s in jeopardy as the company continues to face lawsuits from the National Music Publishers’ Association, which doubled its claims against Peloton in mid-September and wants $300 million in damages for using music from artists like Taylor Swift and Adele in its classes. Peloton says it plans to fight the lawsuit, calling the NMPA “anti-competitive.” That’s not the only headache. Analysts question whether Peloton is getting close to saturation in the market and whether it will be able to curb marketing outlays enough to reach profitability. “They’ve done a great job of creating a product and a platform, but where do they go from here?” says Michael Kawamoto, an analyst at D.A. Davidson, who gave Peloton a neutral rating.
These are some of the same doubts that Peloton started with in 2012. Foley’s heard it all before. Unlike then, he’s got a $1 billion in new capital to prove them wrong again.
“When you don't have money, you can't make your vision come to life. That was kind of the stark reality of the challenges of growing Peloton,” Foley says. “It was never lack of vision, it was lack of capital.”
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