The Next Big Thing discusses topics that other hardware entrepreneurs will find useful, such as prototyping and manufacturing, tools the companies use to keep moving forward, sales channels that have been effective (as well as others that have been complete failures), and managing cash flow.
In Episode 5 we meet with Khalil Zahar, the CEO and Founder of FightCamp. We discuss the power of subscription revenue for hardware companies and how user acquisition channels need to evolve with growth.
Product: An interactive home boxing gym with hardware and software content
Growth: 7x sales Y-o-Y
Sales channels: 100% online direct to consumer
What’s the founding story behind FightCamp?.
We actually launched the company back in 2015 and were unfunded until 2016. In 2016 we got funded by YCombinator (YC) – it was our first check. We moved the company from Canada all the way to California. Since then we’ve raised a total of $5 million.
Talk to me about how you funded the company before YC and how the company is different now that you have venture behind you?
Back in Canada they have a lot of programs for first time entrepreneurs or people that have a technical background and want to launch something. We basically got it started with a mentor program called Futurpreneur that was a $15k loan that we transformed into $45k loan. There was also another program in our hometown, Quebec City, which would give us $400 a month to bring our project to completion. We were competing for the grant against everyone who had an idea: from having a theater piece to painting and some businesses in between.
I feel like now that we have venture money behind us, it’s really like I have limited time, limited resources and I need to reach the next stage at which I can raise either more money or that I can become profitable. It feels like more time pressure, which is weird because you actually have more money.
You didn’t start with FightCamp, you launched with another product called Hykso. Tell me about the difference between those two products and why did you make the change?
We launched Hykso which was specifically just the hardware technology that’s in FightCamp today.
Hykso is the name we found that was a little mythical. We were really inspired by Nike at a time. The Hyksos are known to have invaded Egypt and upgraded the technological warfare, inventing stuff like the chariot. That’s the way we thought of ourselves, inventing tools that the top athletes would use. It was a terrible brand idea because it’s a very hard word to pronounce but it had great SEO–definitely not a lot of competition.
When we launched FightCamp we thought we needed a name that appealed to a broader audience, not something as mythical and underground but something that was a little bit more self-explanatory and easy to share with your friends.
Talk us through the product differences between Hykso and FightCamp.
The core tech of FightCamp is the Hykso product. We switched because at the beginning Hykso was a technological product that only advanced users understood how to use. Now that we have spread the content layer on top of it, it’s a lot more self-explanatory and provides a lot more value to an everyday user. In the beginning the role of Hykso was actually to make a tool of insight for professional athletes. When you have the content layer on top of it, it essentially becomes more gamification tech that enhances the experience.
When a standard user hears about an interactive home box gym with the content layer they will immediately make the connection to Peloton. Were you inspired by Peloton?
Peloton was definitely an inspiration. When we launched I think they were already worth $1 billion. However, our product is evolving in a different direction right now. It’s a lot more martial arts-centric and you cannot treat boxing [and martial arts] the same way you treat cycling just because of the skill levels involved.
In FightCamp there are a lot more things to master. For example, a bunch of our videos are actually tutorials. It’s very rare for someone, before going to a spin class, to actually have a tutorial on how to cycle; it’s already an acquired skill. So just that changes the structure of the product.
There’s a lot of intrigue around boxing and about its culture. That’s an aspect that we’re really doubling down on. We have a bunch of stories that are part of the content offering–bridging the gap between someone who doesn’t know anything about boxing to someone who actually speaks the boxing language and understands its culture.
Peloton was killing it in the private markets but since they went public have had a downturn. Do you feel that downturn is affecting your strategy or how you’re thinking about future product development?
We actually don’t think it’s a bad downturn to be honest with you. They’re still trading at a seven to eight [multiple] of their total revenue. A lot of people used to think that they were overvalued because they would only value their subscription revenue. I think it’s clear that the public market is valuing more than just the subscription revenue, which is very good news for anyone that has a connected hardware fitness product. The other thing that is interesting is that it’s not only Peloton that’s been affected by the difference in valuation between private and public markets. A lot of other companies have been affected by it. We don’t think it’s a Peloton-specific phenomenon as much as a general phenomenon for tech startups that are showing unprofitability.
We think this whole category [home fitness connected hardware] will dominate fitness. People think of home fitness as being the option B to actually going to a gym. We think that mindset is going to flip pretty quickly with people mostly thinking about having something at home and then maybe complementing it with a gym membership.
Do you see companies like Peloton or FightCamp becoming less hardware focused and more content and subscription focused because of the margins that are available there?
Not really. There are tons of products that are just content.
The difference with the products is that [connected hardware] are actually social products. The main problem with having a home fitness product is that it’s boring to just self-inflict torture onto yourself when you don’t have any type of external motivation.
But the connected products actually make the experience a lot better through performance data, which weaves the social fabric between the members. You see other people’s numbers, and you’re trying to get yourself on the leaderboard. You have this avatar that is representing you in this ecosystem. Although it’s not an in-person experience where you can shake a person’s hand and be in proximity with them, it still represents you and you’re seeing these people coming back and doing the same classes.
You start caring about how you present yourself within this ecosystem. So even though you’re working out from home, it’s a whole immersion that is really video game-ish. Without hardware that’s really tough to do. It would have to be something with repetition counting via computer vision. Before we’d get there hardware is how we measure your output. We measure the speed of your punches, the amount of punches you throw; we measure your reps, your squats, push-ups, etc.
I think without hardware you’re really taking a lot of value out [of the product].
You mentioned before when you switched from Hykso to FightCamp you went from a pro user to a more casual user. Have you seen any other changes?
Yes, and really in two fashions. We didn’t even have a subscription model before. Hykso was a tracker. So people were paying once and then they had an app that came with it. It was just a different business model.
With this new model, we’re producing content. We’re releasing four new workouts a week right now and we’re about to increase the frequency. This is the justification for the subscription. On the other side, you get a gym in your home: the best freestanding bag on the market (it doesn’t move around like all the other freestanding bags), a workout mat, a high-end pair of gloves, and the tech.
Subscription revenue is a wonderful world to live in. It’s a lot more predictable, a lot easier for growth and staying afloat.
The other advantage that we have is that the professional athletes in boxing and martial arts are not necessarily the most affluent. The top 0.001% of the whole professional circuit will make 90% of the money. So now that we’re [going after a more casual user] we’re able to tap into a portion of the salary that people usually reserve for fitness, which is really high.
What channels do you think are your most successful for acquiring new users?
Definitely social media ads are a great way to start, like Facebook ads to test the market. You can test different creatives with different targeting to find your niche. That really got us started and still represents a pretty big portion of our ad budget. We’re at the stage now where we’re really trying to grow the organic portion of our acquisition. Facebook, Instagram, and Google ads are only going to get more expensive with scale. We’re trying to pull levers that are actually going to grow with our customer base so we can start compounding the acquisition. Otherwise, it’s really a race to the bottom if you are only banking on paid social.
Where are you getting most new users from right now?.
The majority come from Facebook and Instagram, and then Google. But Google is a different beast. It’s hard to sell something on Google when people don’t even know that your category of products exists. It’s sitting at a different part of the buyer’s journey. It’s a lot easier to make something discoverable through a video that people watch. When it’s [people seeing your product] only from search, it’s a lot harder.
With Facebook and Instagram, specifically, what sort of ROI are you seeing right now?
So the way we turn the knobs of acquisition on and off is by looking at the payback period.
We’re looking to drive a payback period of six months or less. By having the payback period of six months or less we think we have enough financing help to always be in a safe spot. Once it starts to go above six months payback, then you’re taking a risk of running out of money. This is really where financing levers like Kickpay and others are able to offset that payback.
Our model is pretty amazing here. There are not a lot of products that people can invest that amount of money [on hardware] and still invest in a subscription on top of it. We could lose the margin on the equipment and still be profitable day one on a subscription basis.
Have you had any acquisition channels that you tested out that were completely useless?
Tons. They’re useless but only for that specific time. They will all bring sales, especially if you go at it with enough aggression. They’re just going to be unprofitable. So we don’t deem any of them as ‘bad,’ we say they’re ‘bad for now’ given the level of awareness our brand has.
For example, with TV we tried Hulu ads, which came recommended by a lot of people that we know as a way to test your readiness for TV ads. The return on these ads were very unprofitable. It’s not because TV ads are bad but you need a certain level of awareness in other channels before these TV ads actually start working.
You also need test [ads] over multiple touch points, which means that you really need a big budget to say you actually tested those things well. We tried a bunch of channels: TV, radio, podcasts, postcards. We literally had little pamphlets that were showing up in different zip codes of California. That was really unsuccessful as well. Looking for new channels is one thing but looking for compound growth is where we really want to focus our efforts.
Talk me through the tools FightCamp uses to keep the business running. What keeps the lights on?
Stripe – Payment system
ChartMogul – Reporting and analytics
Amplitude – Product analytics
Heap – Product analytics
Kickpay – Inventory and marketing financing
Clearbanc – Inventory and marketing financing
Slack – Communication
Superhuman – Email client
Zoom – Video calls
WeWork – Office space
What’s your biggest learning from when you first started the business?
The main mistake that I see a lot of early stage founders making is waiting too long to launch. It’s better to try it right now and get answers right away, otherwise, you’re operating in the dark. Just ship it.
I think there are a lot of people that are scared to burn bridges with potential customers. I don’t mean to speak for all industries, maybe for enterprise it’s different. But for a consumer product like ours you’re not looking to have ten customers or even a hundred, you’re looking to have a hundred thousand, one million or even ten million. If burning a hundred [customers] is what you have to do to save a year, probably do that.
A second lesson is to be laser-focused as much as you can. At the beginning, we were trying to take advantage of opportunities, but a lot of these were distractions from the main challenge that we had, which was to get a product people actually want and make sure they keep using it. I think that everything else–from working on partnerships that may or may not be fruitful, to talking with potential hires that you only need a year from now–are bad distractions. You should just be really focused on building a product that people want and getting people to use it more often.
Interested in getting financing like FightCamp? – Connect with the team here.