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classtivity

Classpass Is In Session With $40 Million In Series B

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Classpass Is In Session With $40 Million In Series B

Classpass, the NY-based company that offers unlimited fitness classes at 2,000 different studios and boutique gyms for $99/month, has closed a $40 million Series B led by General Catalyst and Thrive Capital, with participation from angels and previous investors.

The startup, which raised $12 million in Series A just over three months ago, has grown from seven markets to 20 markets in as much time. As of September 2014, the company had a total of 500,000 reservations made through the platform. Today, that’s up to 1.5 million reservations with no sign of slowing.

But it wasn’t always expansion plans and hockey stick graphs for founder Payal Kadakia and Classpass.

I remember the first day I met her, at a TechStars briefing in 2012. She was small and quiet, and her co-founder Sanjiv Sanghavi quieter still, but she was in no way timid. Back then the site was called Classtivity and only functioned as a search tool for aggregated fitness classes. But as Payal explained her determination to stay close to her dance roots, the idea resonated with me.

She seemed sure it would work, and I believed her.

Fast forward to January 2015, as I step into the Classpass office near Madison Square Park. I have absolutely no idea who to address first. There are at least 25 individuals crammed into the small space in front of me, two and three to a desk, others clustering on couches, and still others hunching over to look at a graph or email or design prototype on someone else’s computer. A few of them are on the phone. It’s loud. On the day of our interview, it’s 33 degrees and rainy in New York, but I’m already sweating. Overwhelmed, I consider just yelling her name.

“Payal!” I would say, just above the collective volume level of the bustling room. “Payal! Are you out there?”

Just as I’m ready to cup my hands to my mouth, she appears and navigates her way through rolling chairs and messenger bags to greet me warmly.

“We are moving to another space really soon,” she says, for obvious reasons, and follows with some information that isn’t quite as obvious: “There are 35 employees here, 16 across the street, and another 20 in a space nearby.”

We find our way to an oddly spacious conference room towards the back (I’m sure some of the excess bodies in the main room were working from here) and have a seat. We chat about the funding round — Adam Valkin handled the deal on the GCV side, with Chris Paik and Josh Kushner leading for Thrive — as I try to do quick math on growth, pricing, potential revenues, and time passed between $12 million in Series A and $40 million in Series B.

“You’re still in seven cities?” I ask.

“Twenty!” she says loudly, smiling at me as if she almost can’t believe it herself. Thirteen cities in four months, I think to myself. Damn.

Before Class

Payal Kadakia is a first-generation American, her parents were both immigrants from India. She graduated from MIT in Boston in 2005 and went straight to work as a consultant at Bain and Co. From MIT to Bain (and well beyond), Payal danced. She started the Indian Dance Troupe on campus (which is still active today) and then started dancing for a company called Bollywood Axion.

payalbar

“My life was work and dance,” she says. But after about three years of juggling the two lives, she started to feel some resistance. “I started to feel bad or guilty when I would dance, like I was finding time and using energy to do something that I shouldn’t be doing. But it made me happy.”

She had a choice: she could continue at Bain, or go get her MBA, or she could do something that let her chase dance. “I didn’t want to be just one thing,” she explains.

She decided to leave Bain and join the Warner Music Group, which she describes as a corporate position but it gave her the opportunity to dance. She started her own dance company called Sa, a modern Indian dance troupe. Despite success with Sa and at Warner Music, Payal still felt restless about how she should focus her energy.

First Period

In the Summer of 2009, she managed to get the attention of the curator of the Indo-American Arts Council Festival of Indian Dance, which usually focuses on more traditional forms of dance, to give Sa Dance Company a spot in the festival. Not only was the show a success, but they ended up being featured on the front page of the New York Times Arts section.

“That’s when I knew,” Payal reminisces. “At the time, I was studying to take the GMATs, and right after I saw the NYT article I went to my room and threw my GMAT books away.”

Payal spent the next year at Warner, building up a network of other performers, tech clients like Spotify, and maintaining relationships from her Bain years. She also focused on growing Sa as a dance company, not only selling out her own shows but helping other artists and friends sell out theirs.

Exactly one year after her blow-out performance at the Indo-American Arts Council Festival, she flew to San Francisco for a friend’s birthday party. Being in Silicon Valley, surrounded by people fostering ideas and connecting over common goals to disrupt industry, she was inspired. Payal decided she could do that, too.

Second Period

“I thought, ‘I have ideas. I’m creative.’ I just didn’t see why I should be pigeon-holing myself in the business world or staying in corporate America when I already knew that I was capable of taking risks,” she tells me, still palpably excited about an idea she had more than four years ago. She gave herself two weeks to come up with an idea that she loved, and in all of two days, she had come up with a plan.

The Tuesday after she returned, she spent her morning looking for a dance class to attend later in the day. Searching far and wide on the internet, she came up with nothing, and realized that there wasn’t a central source for finding classes nearby. Classtivity was born.

Recess

“Actually,” she interrupts herself with accuracy, “it was called DabbleNYC back then.” After talking to trusted friends and mentors, Payal got a business plan together in a matter of days and started preparing herself for a big life change. “My mom is actually the one who told me to quit at Warner. She saw what happened with Sa and wanted me to go for it.”

In January of 2011, almost exactly four years before this very interview, Payal sent off a farewell email to her coworkers at Warner Music Group. On the email, she included Michael Fleisher, then Vice Chairman of Strategy and Operations at Warner Music, who promptly responded and asked Payal into his office, wanting to chat about her plans moving forward. He ended up being her first investor, and connected her to David Tisch, which eventually led to Classtivity’s acceptance into the TechStars accelerator program. I was about to meet her for the first time. In Payal’s words, she “closed one door but opened up so many more.”

Study Period

Classtivity spent the next year in beta as Payal and co-founder Sanjiv Sanghavi prepared for TechStars.

“The first year was spent working in many ways that were probably not…,” she waits, seemingly grateful for her own mistakes. “What we were doing…,” she waits again. “It was our incubation phase,” she says, as she finds it. “We were meeting studios and compiling a detailed database.”

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Classtivity was the byproduct of a pretty good idea, tedious data aggregation and input, and relatively difficult tech in the form of search. Users could log in, search for any type of fitness class based on various types of criteria (time, date, price, location, etc.) and book right from the website.

“My assumption was that people are already motivated to go to a fitness class,” Payal says. “That’s who I am. I was already ready to go out there and get to class. All I needed was a search tool. But it turns out people need more than that, and that’s why gym memberships exist.”

Third Period

Classtivity continued offering fitness super search and entered the March 2012 TechStars class, with plans to graduate and launch publicly in June 2012.

“That version of the site didn’t even get to 100 reservations in over two years,” she says, seemingly proud of the mistake-turned-lesson.

I think back to my first meeting with her, distinctly recalling her conviction and my compliance.

Payal describes launching at TechStars in June and watching and waiting to see more bookings. They didn’t come. In September, they hired Mary Biggins to help with marketing. By October, they started making UI changes.

classpassoffice

Exam

“We were moving buttons, messing with colors, and then we thought we might need to throw some marketing into it,” she says, almost laughing at herself. “We tried to do this campaign with a ‘Buy One, Get One’ deal and then we just started trying to give classes away for free… Still crickets.”

Knowing the state of Classpass today, it’s easy to laugh along with her as she recounts what may have been some of the most difficult months of her life. With the sounds of the boisterous office pulling at the corners of my attention, I try to imagine having veered away from three separate paths, all of which would have led me to success, to have spent the last two years making almost no progress.

Back then and now, I haven’t ever sensed fear in her, and she hasn’t either. “Through all of it, I don’t remember being scared, and I never thought I was going to run out of money,” Payal says. “Failing wasn’t an option.”

The Winter of 2012 was a bleak one, but Payal had been thinking for a while about a Passport product that would let people buy a certain number of classes per month and work as a loyalty tool for gyms and studios. Ultimately, it goes against Payal’s philosophy that the only thing that should determine your fitness regimen is you, not the amount of classes you’ve bought. However, she knew that giving the first passport for free would get people to start using the platform, and the team believed that the Passport would create dedicated, motivated, loyal users.

(There’s No Such Thing As A Free) Lunch

The studios believed in the Passport, too. Many of the gyms and studios working on the platform were giving away their first batch of classes for free, offering incredible margins for Classpass.

“It ended up being a Groupon for fitness classes,” Payal says affably. “We weren’t seeing the loyalty that we had expected, and it could have worked well but not for the long term.”

As the service was still expanding to new cities, led by cofounder Sanjeev Sanghavi, Classtivity Passport launched in January 2013 and offered 10 classes for $49/month on a one-time basis and was meant to feed back into Classtivity’s search-based model, wherein classes cost between $20 and $25. (Fun fact: that version of the product was available in eight different cities before they shut it down.) Passport wasn’t delivering the loyalty promised to studios, and users were actively trying to fraud both Classtivity and the studios by re-buying the one-time Passport.

It was a problem with an obvious solution, at least in hindsight.

“99 percent of our users said they wanted to repeat the Passport experience,” Payal says as if it was a no-brainer all along, “so by June of 2013 I had all the conviction I needed. We decided to switch to a subscription business and launched the Classpass, $99/month for 10 classes.”

Fourth Period

I ask about the margins on something like that, but she’s careful not to give me any indication of the company’s past, present, or expected revenues. She does, however, explain that Classpass gets a discount from the studios for all the classes available on the site and only pays per class attended.

I work out a little math in my head. If the average class is $24 (to keep things even), and we give Classpass a generous 50 percent discount from the gyms, then she’s paying $12 for the class. If a user spends $99 on the Classpass and goes to all ten of their classes every month, Classpass is losing money.

Let’s assume an even higher discount, as the $24 comes from the price of a single class, which is significantly decreased when classes are purchased in a package. At a 75 percent discount, Classpass is paying $6/class. The power user goes to all 10 classes for the month, costing Classpass $60. That’s a nice margin.

And according to Payal, the average person (not the average Classpass user — she was careful not to talk about those metrics either) works out between four and six times a month, so once a week. You apply the same hypothesized discounts to the average human behavior of four to six workouts per month and you’ve got an excellent business.

Fifth Period

Which is why the shift to unlimited classes didn’t take all that long.

“In fact, the 10 classes/month was more of a barrier to entry,” she explains. “For our power users it wasn’t enough, and for the average user it seemed like too many.” Even though any Classpass user who goes to four classes/month is likely saving money, it didn’t seem that way with the class limit.

Over the course of my math, Payal has taken me through a whirlwind of a year.

Screenshot 2015-01-14 22.23.49

Classpass was only available in New York from June 2013 and on, but by January 2014 the product had gone totally viral. Unfortunately, over that time, Sanghavi had wanted to start working on something new after three years at Classtivity, and decided to leave the company. Mary Biggins, hired way back in September of 2012, stepped in as Payal’s cofounding partner.

Classpass launched Boston in March 2014, and Fritz Lanman, SV Angel, Hank Vigil, Dave Tisch, Kal Vepuri and others swooped in with a $2 million seed.

Seeing the success of the Classpass product, the company was newly branded. DabbleNYC, Classtivity, and the Classtivity Passport are now things of the past. Classpass, both the company and the product, marched onward and went unlimited in May 2014, with plans to expand to one new city each month. In September, Fritz Lanman led a $12 million Series A in September and Classpass soon after launched a mobile app.

Class Dismissed

Her mission is completed, in many ways, even though the Classpass story is just beginning to get juicy. She wants people to be able to easily find a class and work out whenever they want to, not hindered by price or class limits or anything else. Super motivated users like Payal herself (who tries to go to at least one class a day and still performs with her dance company once a month) can go to as many classes as they want, and the average user can balance out the books.

“We actually called it Operation 2015,” she says. “The plan was to get to twenty cities with Classpass by 2015.”

“And here we are,” I say to her, proud in my own way, the battery light on my computer now yelling at me that my time is done.

Eighty-five percent of Classpass users are new to boutique fitness, and 65 percent of users are new to fitness in general. Not only is Classpass providing a way for studios and gyms to be discovered, but the company is actually creating the demand.

Given today’s focus in tech on health and the quantified self, Classpass takes a unique position in the landscape. There are a handful of apps looking to motivate folks to work out — Fitocracy, Fitbit, etc. — and there are far more wearable fitness monitors all over the world than I care to think about.

With a Fitbit Force or a Jawbone Up or a Moov or a Garmin, users are paying a one-time price for hardware and then using the app for free. There is no continuous investment in fitness. Meanwhile, gyms, studios, trainers, teachers, etc. are getting more and more creative with the different ways that people can work out. There are bootcamps, Zumba classes, P57, and there are so many types of yoga.

Classpass is where the modern user, interested in getting fit and perhaps dawning a smart watch or fitness tracker, makes the real investment. In many ways, it’s the gateway to an unlimited and varied source of fitness classes.

Moving forward, Payal describes plans to invest capital back into the studios by helping them build out new locations and offering advanced analytics on the popularity of their classes. “We don’t believe every spot is created equal,” Payal says as we head for the door, describing future plans to use demand curves and variable pricing to help her studios grow.

Featured Image: Classpass