Recent warning signs have been hitting the headlines about how the party is over for start-ups, including the fitness tech industry. Fitness tech giants like Peloton, Tonal, and Mirror experienced a gold rush during the pandemic as consumers were stuck at home while gyms were closed but wanted to stay in shape. Despite offering different types of digital workouts, there is one thing all these tech companies had in common; they grew up in a period of cheap money.
Tech start-ups are finding it harder and harder to raise funding, as venture capitalists expect better discipline versus growth at all costs, forcing start-ups to focus on cutting costs and getting closer to breaking even. For later (growth) stage companies, this has meant either down rounds and markdowns or more exotic structuring in liquidation preferences and anti-dilution plans to maintain high-end evaluations.
Many established connected fitness start-ups face the double dilemma of a contracting funding environment coupled with the market momentum pendulum swinging away from them. We have entered the post-pandemic era, and consumers (almost) returned to their pre-pandemic habits - including in-person fitness classes. In contrast, direct-to-consumer fitness businesses have pivoted from gearing for growth to cost control while finding new pathways to profitability.
To put this into the proper context, below are some recent examples of how this played out for the connected fitness ecosystem:
- Peloton has had to stop producing their bikes in-house and lay off employees to cut costs as they're experiencing a significant drop in demand for their bikes. Today you can get a used Peloton bike at a fraction of the retail price on various online marketplaces.
- Hydrow had to launch an affordable line, the Hydrow Wave Rower, while laying off several of its employees, citing a 'strategic pivot.'
- Tonal recently laid off a 3rd of its workforce in the hope of becoming profitable and to gear up for a 'successful' IPO.
- Mirror, now part of Lululemon, hit the wall at the end of 2021, with its new parent reporting that it had met only 50% of that year's sales goal.
- Once known for its expensive studio stand with form tracking, Tempo dropped its original product from its website, focusing on the much lower-cost, Tempo Move that connects to your TV.
- Zwift laid off 150 people in May and axed its plans for its connected bike hardware to focus solely on its software and virtual cycling environment.
So what does the end of cheap money mean for the fitness tech market? We believe it points to two possible outcomes - platformization and openness.
Platformization in fitness tech means utilizing existing 3rd party platforms / marketplaces rather than reinventing the entire wheel and focus on the development of key differentiating features. We estimate that 70% of the foundational software capability sets of Peloton, Tonal, Tempo, Mirror, and Hydrow share similarities - videos, leaderboards, programs, challenges, badges, and profiles. Platformization helps the next generation of connected fitness entrepreneurs utilize a purpose-built fitness platform and scale faster with less money by avoiding reinventing the same baseline capabilities repeatedly. In essence, we see ourselves as a platform that provides the stock race car which a start-up can tune and customize while building a winning racing team vs. trying to manufacture an entire car from scratch.
Openness means fewer proprietary islands and more partnerships between content creators and hardware creators. That can mean democratizing access to data by providing open data standards that operators and connected fitness manufacturers can utilize and creating a feature-agnostic platform that fits the studios' and manufacturers' needs. For example, specific metrics could be mapped to a particular modality; A virtual yoga class can utilize computer vision to track the accuracy of poses, while a HiiT class can leverage the participant's connected wearables to display relevant HR-based metrics. We are seeing more and more new omnichannel concepts developing from local fitness entrepreneurs that will run on third-party connected fitness equipment, especially in spin, where the data standards and interoperability are more established.
Suppose connected fitness is in your strategic pipeline, or you are actively developing new concepts for virtual. In that case, you'd most likely want to get to a better user experience and profitability faster than considering a stock race car. We'll do the customization according to your needs. If you are still on the verge of learning more about connected fitness for your fitness studio, check out this blog here. Happy tuning!