Issue No. 221: Hard Gains

Burning cash amid slowing demand, another connected fitness company is rethinking its post-pandemic playbook.

Maxed Out

Smart gym maker Tonal is exploring strategic options, including raising new funding and seeking potential buyers.

But, as home fitness sales decline, investors may be reluctant to step in. Meanwhile, would-be acquirers like Peloton are facing their own challenges.

With no clear path to profitability, who backs or buys Tonal remains unclear.

Ups and downs. This development follows a chaotic stretch for the company and other home fitness brands.

Benefiting from pandemic lockdowns, Tonal said it gained 90% share of the smart strength category as sales surged 800% in 2020.
Last summer, as COVID restrictions lifted and gym visits rebounded, the company laid off 35% of its workforce.
Also in 2022, it landed $100M at a $1.9B valuation, bringing its total funding to $550M.

Of note, investors in the latest round received a liquidation preference, recouping two times their capital in the event of a sale or bankruptcy.

Tonal’s risk makes its current fundraising efforts much more difficult — the company is in talks to add new capital at a $500M valuation or lower, per Bloomberg.

Red flags. Despite raising a half-billion in venture funding and earning a reported $220M in revenue between May 2020—November 2021, Tonal is struggling to find a sustainable path forward.

Complicating matters, a host of operational struggles have stifled progress.

The company recently increased prices for its wall-mounted unit and monthly membership, reaching $3,995 and $59.95, respectively.
Tonal’s equipment manufacturer Foxconn is suing the company after it failed to pay down an owed $5M.
Rising customer acquisition costs and pricey endorsement deals with the likes of LeBron James and Serena Williams have hamstrung profitability.

Signaling more changes to come, Bloomberg also said Tonal is likely to enlist a new CEO, replacing founder Aly Orady.

Feeling the Burn

As an industry-wide correction plays out, Tonal is just the latest domino to fall.

After raising billions in recent years, key players including Peloton, Hydrow, Zwift, and iFIT are cutting costs and jobs.

But, according to L Catterton managing partner Michael Farello, “there’s a lot of growth remaining” in connected fitness.

Speaking to Yahoo! Finance, Farello said integrations between home equipment and wearables like Oura will drive adoption among data-obsessed consumers seeking greater personalization.

Of course, this belief aligns with L Catterton’s investments in Tonal, Hydrow, iFIT, and a pre-IPO injection into Peloton.

It also makes a compelling case for an L Catterton-orchestrated roll-up, combining marketing, manufacturing, and other core business functions. Think Xponential Fitness… but, instead of boutique studios, smart equipment is the focus.

Looking Ahead

Whether it’s Tonal or any other connected fitness brand, the question of who buys them and for how much remains unanswered.

The most recent example, lululemon’s acquisition of MIRROR makes headlines for its price—$500M—not its impact. And, although Peloton and Tonal discussed a sale last year, a deal never materialized.

For his part, when asked about exit opportunities, Farello didn’t talk roll-up; he pointed to Big Tech as the most likely acquirer. Interestingly, Amazon’s Alexa Fund is a Tonal investor, so there may be synergy there.

But, as tech’s biggest names undergo mass layoffs of their own, taking on a money-losing fitness company doesn’t seem likely in the near term.

🎙 On the Podcast

MUD\WTR founder and CEO Shane Heath shares how his mental health journey led to developing a low-caffeine, mushroom-based coffee alternative.

We also cover: the rise of functional beverages, the shroom boom, and why he treats his employees like elite athletes.

Listen to today’s episode here

💼 Strava CEO Michael Horvath resigns

The athlete social network is searching for a new chief executive.

Stepping down. In an open letter published on the company’s website, Strava co-founder and CEO Michael Horvath announced his resignation.

“I have decided that Strava needs a CEO with the experience and skills to help us make the most of this next chapter.”

Horvath previously vacated the top spot in 2013 before returning to the helm in 2019.

Here and there. Founded in 2009, Strava has reached new heights in recent years.

The platform’s user count exploded from 55M in May ’20 to 100M+ today.
In November ’20, it raised $110M in funding at a valuation north of $1B.
Strava acquired Recover Athletics and FATMAP to bolster its paid membership.

But, this period of growth included its share of challenges — the company has laid off staff and raised prices while trying to strike a balance between its free and premium offerings.

No easy task, Strava is attempting to enter new markets, from connected health to trail sports, without alienating its base of runners and cyclists — all while driving more subscription revenue.

Looking ahead: Now, according to Horvath, he’s handing over the reins to someone capable of taking Strava to the next level. Reading between the lines, his successor will likely be tasked with converting more paid subscribers and shoring up profitability en route to a potential IPO.

🥕 Food as medicine gains approval under Medicaid

The Biden Administration is okaying the use of Medicaid funds to pay for fresh produce and nutrition counseling. The move aims to bolster preventative health measures and reduce costly medical interventions.

Pushback: While the action has received some bipartisan support, opponents argue it’s an overreach for unproven science — and also that existing federal food benefits program SNAP (fka food stamps) makes the new policy redundant.

While the debate ensues, many Americans continue to see their needs go unmet.

10% of US households experienced food insecurity in 2021.
54.7% of SNAP benefits are redeemed on ultra-processed foods.
Adults in food-insecure households are ~40% likelier to develop chronic diet-related illnesses than those who aren’t.

Prescription foods. Nearly half of all US deaths are linked to diet-related illnesses, with studies suggesting a 75% greater mortality risk for food-insecure adults.

A potential solution, home-delivered, medically tailored meals could save the US an estimated $13.6B a year, with most of the benefit derived from Medicare and Medicaid programs.

But… between Big Food lobbying and misaligned incentives of US healthcare, the status quo is deeply entrenched — and creating widespread access and affordability for fresh, healthy food won’t be easy.

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📣 Calling all recruiters

If you have experience in health & fitness tech, we should talk.

Meet and greet. In addition to curating hundreds of roles on Fitt Jobs, we often make one-off hiring introductions. But we receive way more inbound from job seekers, companies, and recruiters than we can manage.

So now, we’re working on new ways to connect top talent with leading health, fitness, and wellness companies.

Want to hear more? Fill out this form and we’ll keep posted on what’s next.

📰 News & Notes

Caffeine is a legal PED.
Gut health linked to exercise motivation.
Meal service Daily Harvest lays off ~20% of workforce.
UnitedHealthcare launches move-to-earn rewards program.
BCBS of CA taps Virta Health for diabetes reversal programs.
Fitt Jobs: Curated openings with top health & fitness companies.
movr launches movement health program builder for trainers, orgs.
Startup Q&A: Fount COO Clayton Kim on decoding human optimization.
Alo Yoga debuts immersive shopping, wellness tutorials, workouts in VR.
Halle Berry becomes equity owner, CCO of gut microbiome startup Pendulum.

💰 Money Moves

Natural Cycles, a Swedish femtech platform focused on period tracking and fertility, raised $7M in a funding round led by Samsung Ventures.
No-code health & wellness app developer Ongo raised $8.2M in a funding round.
Peer-to-peer mental health counseling platform ShareWell secured $1.3M in a pre-seed round.
HeyKiddo, a kids mental health app, raised $1M in a seed round.
Beaming Health, an autism-focused pediatric therapy platform, secured $1.7M in pre-seed funding led by NextGen Venture Partners.
VAE Labs, makers of a caffeinated oral spray, added $2M in a seed round led by Draper Associates.
Yerbaé, makers of yerba mate energy drinks, completed a reverse merger and will go public.
Awake Chocolate, makers of functional bars and snacks, closed CA$5M ($3.7M) in a funding round led by Btomorrow Ventures.
cellvie, a Swiss biotech company focused on mitochondrial health, raised $5.5M in a funding round.
Australian mushroom-based alt-meat producer Fable Food raised $8.5M in a Series A round led by K3 Ventures.
Electrolyte beverage maker ROAR Organic added $6M in new funding.
The Ugly Company, maker of upcycled dried fruit snacks, secured $9M in a Series A round.
Allergy care startup Wyndly raised $2M from Y Combinator, Goodwater Capital, and others.
Marker Learning, a platform for dyslexia and other learning disabilities, raised $15M in a Series A round led by a16z.
Tofu maker Morinaga Nutritional Foods acquired plant-based meat manufacturer Tofurky and its sister brand Moocho.

Today’s newsletter was brought to you by Anthony Vennare, Joe Vennare, and Ryan Deer.