Introduction

Patrick: [00:00:47] This week's episode is part of an experiment, and so requires a longer than normal introduction. I've come to view this podcast as a learning tool, a means to understand a new topic in a short window of time. One of those areas is venture capital and startups, an area that one year ago was completely foreign to me. I think the best way to learn is aggressive immersion in the topic, along with some consequences, what we often call skin in the game. Accordingly, this is a conversation with a founder of a startup in which I, personally, am an investor. I say this in full disclosure because I believe in being very transparent with you, but also because I obviously want this business to do well. Part of the reason I invested was because I thought I could personally affect the outcome, in part, by exposing the model and ideas to you all. I deeply respect your opinions and collective breadth of knowledge and welcome thoughts that you have on this startup and this topic.

The founder in this case is Brett Maloley. His company is called Ladder. Ladder represents an overlap of many topics we've explored together over the past year. We've talked about venture capital, health and wellbeing, the difficulty of fundraising, and parallel outcomes and startups. We also spent an entire episode with Alex Moazed talking about the business model that Ladder is pursuing. This is what Alex calls the platform business model and what my favorite technology writer, Ben Thompson calls the aggregator model. Alex wrote the book, Modern Monopolies about this model, which describes how companies like Uber, Airbnb, and others serve their clients. Platform companies sit at the intersection between consumers and producers in a given category helping make life easier, cheaper, and/or better for consumers and more profitable and flexible for producers.

But the value creation itself is about facilitating exchange more efficiently than it is about actually creating the underlying product. Airbnb, for example, doesn't own real estate, the value in this case, but they unlock the potential of real estate owned by others. Same for Uber, which so far, doesn't own any cars. As Alex explained to me in our discussion, a key sign of a market which might benefit from a platform company is some form of latent, untapped supply.

That brings me back to Ladder. The company is being built to unlock latent potential in fitness and potentially other types of coaching. Personal trainers work eleven hours a day, but have four hours of downtime. That is the untapped supply in this case. Ladder will allow two key things, much cheaper access to a real fitness coach for consumers who don't want to spend hundreds of dollars a month in the current format and a way for trainers with lots of free time to both get new customers and to better engage with their existing customers. Think of it almost like Open Table, which started as a way for restaurants to better manage their reservations, but turned into a liquid market for consumers to make reservations themselves.

The reason this is so interesting, I think is the enormous size of the commercial fitness industry and the fact that it hasn't changed in a long time. I love people who have an almost bizarre level of knowledge in a niche field. Brett certainly fits that bill. He grew up with the industry. His mentors and relatives have literally built the commercial fitness industry, what we think of as gyms and personal training, as we know it. He knows how this legacy model works and ticks, the flaws and benefits of different business models and why the future might be different with a much larger percent of the population using a fitness coach and maybe other types of coaches in categories like nutrition and health.

To see the app in action and get paired with a coach, Brett kindly set up a promo code of sorts, like you often hear on other podcasts. If you search for Ladder Coach in the app store, download the app and then use the promo-code ILTB, as in Invest Like the Best, you'll get 50% off the service forever. I don't get any cut of that at all. In fact, you could think about it like a subsidy that I'm in part paying for as an investor. Brett and his team are data heads. Their main goal early in this company's life is to generate data on the relationships between consumers and their new coaches, to figure out what works best for both groups and to constantly improve the service, so the early adopters among you get a permanent discount.

Now this will be obvious, but nothing about what I do personally is investment advice that you should mimic. Like my investment in Bitcoin, this investment represents a very small part of my portfolio. As always, I think the majority of anyone's portfolio should be balanced and well priced. I do not expect that I have any skill in selecting startups as probably very few people do, but I know that having some skin in the game means that you learn differently, more efficiently and faster. I hope you enjoy this collective experiment, which is largely the result of what I've learned from past guests and from all your support, which helps me meet those great people in the first place. Let's dive into my conversation with the founder of Ladder, Brett Maloley, who starts by describing how he got his start in the fitness world.

Fixing the commercial fitness industry by changing it

Brett: [00:05:24] I grew up in the fitness industry. My dad was a part-owner of some health clubs, and then started a company that sold fitness equipment. Growing up, it was always there. For me, it was baseball and the fitness industry. Boys have a very close relationship with their fathers, and for me and my dad, it was baseball and fitness. My whole life, I thought I would play professional baseball and that's what I would do forever. When I realized that that wasn't in the cards, I got into the fitness industry. In retrospect, it makes a lot of sense why, because that was the last thing that we had in common. It was an easy segway.

I moved out to Santa Barbara after I stopped playing baseball. I lived with one of my dad's best friends, his business partner, and a guy that I had always heard a lot about, and I had met a couple of times, but I didn't really know him. So here I am in Santa Barbara, living with older gentlemen that I didn't really know in a trailer on his property. He owned a company that sold flooring to gyms, so turf, suspension, wood floors. Him and my dad worked together. I always say that summer was when I uncovered my passion for the fitness industry. Picture a 22-year-old kid that is completely up in the air relative to how he is going to spend the rest of his life, because he had thought about doing one thing, playing baseball, and now he realizes that that's not going to happen.

I would ride my bike to the office every day. We would eat breakfast together and lunch together and dinner together, no TVs on the property. It was a summer of talking and reading. It was all focused on the fitness industry. Why did this happen? Who started this? When did this come about? It was like walking through a museum of the commercial fitness industry. John had been at the very beginning with Nautilus, which was the first really notable fitness equipment company, and then at Life Fitness. My dad tells a story about how he bought one of the first Life Cycles. Before Life Fitness was Life Fitness, it was called Life Cycle.

So I'm starting to meet all these people and spend time with all these men and women who literally started the fitness industry as we know it today. That does something really special to a young person because it makes a lot of things seem within reach, right? When you go to a gym and you realize that this is one of 200 of these gyms that exist in the world, that feels very big and feels like potentially something that is bigger than you're capable of to some extent, but then when you meet the person who started that and realize that he is just a regular guy that had been there early and had had an opportunity to do something and did, it becomes a lot more palatable. That summer to me was an awakening. I became obsessed with the industry. I would read everything I could about it. I would talk to anyone who would listen about where it had come from and where it was going.

Then I needed to get a job. There I was in Boston, back at my parents, ready to take on the commercial fitness industry. I got my first job at Life Fitness selling treadmills. It's so interesting. Cause I remember my first interview, a woman named Phyllis Dannin who still works at Life Fitness, who is, I think, the executive vice president of sales now, has been there for a long time, she used to work with my father, she's interviewing me. Phyllis is tough. She has a reputation in the industry as being very aggressive. She's become very successful, impactful with the development of companies like Planet Fitness and some other big fitness companies. She asked me what I wanted to do in the industry. I remember at the time thinking I wanted her job. I told her that I want to someday have your job. I got the job. I started selling equipment. It was probably no longer than six months until I realized I didn't want that job anymore. I wanted to be the CEO of Life Fitness.

Over the course of my early career, I would just move to the next biggest thing until a point where I ultimately realized that the best way to help the commercial fitness industry is to help change it, because it's still fairly young and it's very big, but it hasn't changed much. At this point, it just isn't offering enough utility to the consumer. The value of a gym membership is actually a negative delta at this point, so for 10 bucks a month, you get a gym membership with unlimited tanning and unlimited childcare, and you can bring a friend, so it doesn't add up. It doesn't make sense, but we still have 75 million gym members paying 20 bucks a month. We still have seven and a half million personal training clients paying 350 bucks a month. The opportunity in my opinion is massive, but it needs to be done collectively.

At a certain point after I had gone through the selling fitness equipment and started my first company and exited from that and started my second and sold that, and then I was a CEO of a small, publicly-traded company for a short period of time, couple of years. We took that private. We started Ladder. With Ladder, it was really about taking everything that the industry has taught us and using it to create the future of the industry, so working with the commercial fitness industry, an industry that for a long time has had a tough time working with technology, because there's the huge dichotomy between the commercial side of the space and the direct consumer side of the space. We wanted to champion the commercial side of the space, work hand in hand with the gyms to drive a superior solution that ultimately, in my opinion, allows them to not only thrive but simply survive in the future. As more and more opportunities and offerings become available, an industry that in the purest sense, just lacks so much utility likely won't survive. That's okay. We just need to make some changes, because we still have so much going for us.

Speaking on behalf of the commercial fitness industry, we just have to re-examine some of the ways that we do things and make some changes. I think most industries go through a similar paradigm shift. The commercial fitness industry is a lot younger than most people think. We're excited to continue to build Ladder into what we believe will be one of the most significant changing agents in paving the way for the future of the industry.

Patrick: [00:12:45] For all the people that are listening to this and approaching the app and the company for the first time, just describe what it is and what features it will have early on.

Brett: [00:12:54] When someone asks me what Ladder is, it's a platform that enables more people access to health and wellness professionals. In a space that is hamstrung by the logistical inefficiencies, and it is purely an exchange of time for money, we believe we have a solution through driving a hybrid of digital and in-person coaching that can scale the earning potential of the coach, improving their core competency and monetizing their unused time while simultaneously delivering a far more affordable coaching solution, but more importantly, a more effective one. We believe that the sweet spot is that hybrid between digital and in person.

By no means, are we trying to replace in-person training. We're trying to create an ecosystem where instead of 10% of gym members working with a coach roughly 5.1 times per month, we have all gym members and furthermore, all people working with a coach, but less frequently in person, where the backbone becomes the digital relationship. Then we're plugging and playing in-person care where it's needed, creating more of a dynamic pricing model that even further reduces the barrier of entry to the consumer. I envision a world where everyone works with a coach and potentially more coaches building out that action care team that can actually make people live healthier lives, and I think, ultimately happier lives as well.

Patrick: [00:14:13] What do you think the ratio needs to be, I've been thinking a lot about this, between a digital call it a digital workout or digital interaction with a coach and in person, some amount of in-person, even if it's almost like FaceTime or something? Just the accountability component of a coach is a big reason why say I've used one in the past when I have, which I've done a couple of times and having them there watching me. I don't know. There's something about that. There's a component of, of Ladder that currently it's called a promise, right, which is this accountability function baked into the whole process. What do you think that ratio on average, a couple of years from now, let's say we're up and running. What do you think that ratio needs to be of in-person versus digital?

Brett: [00:14:54] As far as the ratio specifically, I think it changes. In everything we've done, we've tried to focus on the science of behavioral change. We've tried to create a product that is mindful of how behavioral change works. Accountability is that secret sauce. That's the thing that products and entities of any kind in the space are always trying to drive. We know it comes down to some variation of ability, so do you have the resources, the understanding, do you have the motivation and the accountability, so do you want to do it? And then the trigger, is it constantly mindful to contribute back towards the motivation?

A lot of what we're doing is building a relationship. Once the relationship becomes stronger than I think the in-person reduces. I have coaches that I haven't spoken to or seen in decades. If I was to communicate with them and get a plan from them, I would follow that process to a T, because I've already established a relationship with them that drives accountability. We know that accountability is the direct result of a relationship, either with yourself or with someone else. For people that are already self-accountable, there are a lot of great products, calorie counters, food logs, different things of that nature.

That's not really us. We exist for the larger part of the market that needs a little help relative to accountability. For a lot of people, they don't have it within themselves. They also don't have anyone within their sphere of influence that can hold them accountable. In a lot of ways, we strive to create relationships with people or between people rather, that can drive accountability. Over time, as the relationship becomes stronger and stronger, I envision the in-person reducing. It's a tipping point to some extent where we start off with digital and then potentially in-person is a little higher in volume at the beginning, but as the relationship gets stronger, there's the potential to reduce in-person. It can always be brought back in the event that, you're going through a rut or things happen. There are so many variables at play here.

Patrick: [00:17:11] Maybe you could describe from your perspective, what the platform business model is, key components of being successful in scaling sort of a two-sided platform where coaches are one side, people working out is the other side. Give me a high-level overview of what you think that business model is, why you chose it as a way to attack this opportunity in this space, and then we'll get into some of the levers.

Brett: [00:17:33] Platforms reduce the friction between effort and results. They thrive in industries that are very large, very stagnant, very underserved. I love platforms in general, because their ability to scale is unlike any other model I've seen. In fitness industry, it's almost perfect, because we see this massive market that hasn't changed in close to five decades and really lacks utility to the consumer. There's only so long. The commercial fitness industry can continue to grow with a 60% inactivity rate and a 50% attrition rate. Yet it is continuing to grow. We know that 16.5% of the country belongs to a health club. That number ...

Patrick: [00:18:13] What percentage is it?

Brett: [00:18:13] 16.5%. That number is staggering, if you think about it. I think, or so the International Health Racket and Sports Club Association in their global report from 2015 listed that one in four individuals in the United States have been inside a health club, which is mind boggling. With that said, the industry really relies on that inactivity, which is good for now, but it's not necessarily sustainable. As more competition comes about and there are more things available to consumers, I just don't believe that you can rely on a model that lacks utility.

We know that 16.5% of the country belongs to a health club.

We set out to change that. We thought the best way to do that would be through a true platform business model, where we're literally just productizing the existing ecosystem, connecting coaches, our producers, with people who need or wants to be healthier, our consumers, in a way that removes the logistical inefficiencies that currently exist, and in a way that reduces the barrier of entry to the consumer, and in a way that monetizes unused time to the producer. Big picture, just like Uber has their drivers/producers, riders/consumers, or Airbnb has their host/producers, guests/consumers, again, we have our coaches/producers, people who need or want to be healthier/consumers.

The one thing that I think is a little bit different about what we're doing is I actually believe that in executing this model that provides a better widget, essentially. We also are expanding the amount of people that can access health and wellness. With what we're doing, I think that the hybrid of digital and in-person is a far better solution for people, but I also think that it opens up the door to get more people into it. I don't know if we're going back to reasoning by analogy, if there's actually a platform that has had the ability to do that, maybe Airbnb has, to some extent, I think maybe more families are taking vacations. Obviously, that's one of the most special companies that exists. I think that we have every opportunity to create what could be the most dynamic and impactful platform business model that we've seen.

I think the commercial fitness industry for a long time has been ignored for the most part by technology and furthermore finance, because it's a very asset-light space, and it's very fluid and there are a lot of ups and downs, but it's still here and it's getting bigger. It's massive. The fact that people go to these facilities multiple times a week and actually spend time at them is very special. I just don't know that anyone's ever been able to create an entity that brought them together. There isn't a, or if you look at the olden goose for the industry is healthcare subsidies. We know that one of the best ways to get more than 16.5% of people to belong to a gym or more than 22.5% of the population to be active is to have it affect their wallets and actually make it less expensive to be healthier, which I believe will happen.

With that said, there isn't a health club chain or even group of health club chains large enough to provide enough data or enough access to users or members to really drive any dynamic paradigm shift at any level of scale, unless you can actually create an entity that works in lock step with the commercial fitness industry. Core to our model was finding a way to serve the commercial fitness industry and help them in the interim, but also help them potentially down the road and really allow these guys that put, guys and gals, that put their blood, sweat, and tears into building an industry that is so special. It's such a small community. We have a few trade shows every year. Everyone knows each other. It's a very tight-knit group. We think about health clubs as been around forever. They really haven't. The industry is ...

Origins of Health Clubs

Patrick: [00:22:17] What's the origin? What was it like the first gym?

Brett: [00:22:21] There have been variations of gyms around ...

Patrick: [00:22:23] Obviously...

Brett: [00:22:23] ... since Roman times, but gyms, as we know them came about in the mid-70s, into the mid-80s. I believe electronic funds transfers really changed the industry where people were being billed on a continuous basis as opposed to the pay for play space. That really changed the dynamic from what were transient racket clubs, which would see peaks in different seasons, depending on where they were in the country, to a more consistent model that enabled them to finance themselves in a way that enabled them to buy nicer things and add different components to the business as we know it today, things like childcare and tanning was big for a while, but just basic as theme sauna, a group exercise.

Having heard all these stories about what happened to group exercise, how it went from where it was to where it is now, where personal training came from, I remember literally sitting in Santa Barbara with John Donati asking him about personal training. For all intents and purposes, he invented it right. Or he was one, there are other people doing similar stuff at the same time, but he actually created the first type of curriculum. Guys like Augie Nieto who started Life Fitness, my dad bought one of the first-ever Lifecycles. He tells the story of buying it and not being able to pay for it in full, so Augie left the machine but took the battery with him. Then when my dad sent the rest of the money out to Irvine, he sent the battery back. Life Fitness went on, or Lifecycles went on to be Life Fitness, which is a subsidiary of Brunswick multi-billion dollar company. So it's all I know.

Patrick: [00:24:00] Let's talk about the current state of it. You mentioned a couple of stats already. 16% of people belong currently. Give me a sense for like how many gyms are there? Within each gym, what are the key stats in terms of people signing up? Everyone probably thinks, the first thing I thought when we were talking about this is he, everyone signs up for New Year's resolution for a year, two-year contract, whatever. They go for a while. It lapses. Attrition rate's super high, a small percentage of people have trainers. Just some stats on the ecosystem, what the state of commercial gyms are in the country.

Brett: [00:24:33] Yeah, so there's about 35,000 commercial fitness centers in the US, but that's only for profit facilities. That doesn't include YMCAs, JCCs, college rec centers, community centers, which we don't really know how many of those there are. Best estimates are there are probably around 55,000 facilities that a human being would say is a gym. Of those facilities, they average about 2,500 members. Roughly 10% of those people work with a coach. They pay about $68 per session and train about 1.2 to two times per week. The average attrition rate is right around 50%. The average ...

Patrick: [00:25:11] That's for the gym?

Brett: [00:25:12] Correct.

Patrick: [00:25:12] Yeah.

Brett: [00:25:13] The average attrition rate relative to the personal trainer-client relationship is right around 13 and a half to 14 weeks. That's on average. We have a huge spectrum of facilities, right? You have your $9.99, they call them high volume, low price, whatever. You can call them, whatever you want, but those are the $10 a month clubs that came about as of the last ...

Patrick: [00:25:33] Give us an example of one of those.

Brett: [00:25:37] Like a Planet Fitness. Planet Fitness is a little different because they don't have personal training. In the northeast, Work Out World potentially is probably the biggest one. Then they charge a little bit more for other things. Group exercise, childcare gets you up around $20 to $24.99 per month is the average order volume. Then on the other end of the spectrum, you have the Equinoxes of the world that are upwards of $200 a month.

The sweet spot is around $30 right now. We've seen that decrease massively. When Planet came out with the $10 a month clubs, the ones in the middle, the Gold's Gyms types that were charging anywhere from $40 to $60 a month had to decide whether they were going to try and add more value and go up, or whether they were going to succumb to the competition and go down. Unfortunately, we saw the majority of them go down. Now there's tier of $10, a tier of $20. Then there's still some of the mid-market, regional players that are in that $30 to $50 a month. Then you've run into your sport club types with pool and basketball and stuff that is likely closer to $100.

Patrick: [00:26:43] What did Planet Fitness realize? What did they change that allowed them to charge so little? Because my impression is that that's been a hugely successful story. I may be wrong, but I've seen that pop up more and more in writing, like in business cases, things like that. What did they recognize and do that was revolutionary or allowed them to grow so fast?

Brett: [00:27:03] Yeah, so we've talked about retroactive narratives in the past. The retroactive narrative for Planet is that they knew more than everyone else. They were able to drive more volume at a price point, understanding end activity with a facility that could still handle all those people. The reality is they had a couple of failing facilities and were trying to get as much out of them as they could. They tried that first, $19.99 and then $10 a month.

I think what they realized was that, or this is what I think, I don't know that anyone really knows why they work, but they are working and Planet is doing great. For most people, the only thing they have in their lives that is working towards a healthier lifestyle is that gym membership. The question becomes, is it worth more to the member to continue paying the $10 a month than to just give up on their quest for a healthier lifestyle? So you have those people and then you have the people that literally just, it's not worth their time to cancel at $10 a month or they forget. It's working.

For most people, the only thing they have in their lives that is working towards a healthier lifestyle is that gym membership.

I don't know that it's great for the industry as a whole. For a long time. The industry, from an organizational standpoint, the IHRSA’s of the world, were trying to shut out the Planets of the world and the lower-cost providers, but now they can't. Now, the lower cost providers are such a big part of the market where they're approaching being bigger than the rest of the market combined. We'll see where it goes. I think for a lot of people, Planet Fitness is great. I mean, to the naked eye, it doesn't appear to be much different than most other facilities. The thing that I love about Planet is the somewhat cheesy, a lot of people would say, branding, that they've done. They've done a lot of things over the years that people were like, "Why would they do that?"

Patrick: [00:28:51] Purple.

Brett: [00:28:52] Yeah, the purple, the pizza on Fridays, the getting rid of dumbbells over 55 pounds, but they know who their, their beachhead user is, and they market to that user.

Patrick: [00:29:00] Well, the purple is an interesting story behind that too, as well, right, as far as that's actually part of their business model.

Brett: [00:29:08] Yeah, I mean, I wrote an article when Planet IPO'd, I think it was 43% of their total gross revenue comes from the resale of commercial fitness equipment. Having been in the commercial fitness industry and selling commodity commercial fitness equipment for years, at the beginning, I'm like, "Why is this stuff purple? This is really ugly." What I came to realize is that as a franchisee, you're mandated to buy equipment that falls in line with the franchise or guidelines. In the case Planet Fitness, it requires you to buy purple equipment. Well, the purple elliptical machine that costs $3499 is the exact same as the non-purple elliptical that cost $2999, just so happens that you're buying it from Planets, so Planet's making $500 on that unit.

Patrick: [00:29:59] Awesome, smart.

Brett: [00:30:00] Yeah, it makes a lot of sense. It's one of their key drivers from a revenue standpoint, whether or not it's sustainable, who knows, but you find a Planet Fitness franchisee that might have 5,000 ellipticals paying the same price for them as the guy on the corner who might have 25 ellipticals.

Patrick: [00:30:20] There was a great quote, I saw, I think it was Paul Graham recently that said to raise a seed round, you just need to please investors, but to raise an A round, you need to please customers. Let's talk about how that's going to happen. We've mentioned earlier the importance of maybe starting with more in-person relationship building type stuff with a coach, and the fact that that can get phased out. As you said that, I realized that that totally happened with me too. That when I did, I did CrossFit for example, and the early stages, we just did it here in the basement of the building we're sitting in. I wasn't actually at a gym. We've got a gym here. He came to us and did a small group.

Early on that relationship was everything, right? Then I phased him out. It became just a relationship over text, basically sending workouts. Really straightforward. Talk about the customer experience. This word, when I talked to Andy Rachleff the Benchmark, one of the Benchmark founders, he likes this word "delight". He wants people that use a product to be delighted. I'd love to hear the components of how you think about delight. How will the experience, the product and the experience of being a Ladder customer or Ladder coach, I should say, because it matters on both sides of the platform. How are you thinking about that early on and how will you kind of test and experiment in trying to delight people?

Brett: [00:31:37] Yeah, so I guess we'll start with the interaction and then I can speak specifically to the consumer and then the producer. The way that the product works now is one, a consumer, or I guess a prospect at that point comes to the platform. They go through an assessment. The assessment should take between 60 and 90 seconds. It includes a wants based assessment, so what type of coach the consumer is looking for, old, young, male, female, more of a cheerleader type or more of an analytical type. Then we do our very best to leverage cognitive behavioral therapy geared questionnaire to uncover the needs of the consumer relative to their surpluses and/or deficits as it relates to exercise, nutrition, sleep, and stress management. We use that information in combination with location to make a commoditized match. We're using that information to match a consumer with one coach, the coach that we feel is best for them. We can dig into why we chose to go with commoditized versus un-commoditized matchmaking.

Patrick: [00:32:39] What would un-commoditized be? Meaning you get a menu or something?

Brett: [00:32:41] Yeah, so you'd have the ability to pick between coaches, right? You order an Uber, you want to get from point A to point B. You don't necessarily need to know who your coach or who your driver rather is, but probably most famously we've seen what happened with TaskRabbit and their transition from a commoditized platform to a non-commoditized platform. There are a lot of reasons core to our business model and core to the consumer experience that we believe the commoditized feature will be very important for us, not only at the beginning, but down the road.

Anyway, once the match is made, the engagement is driven from the coach to the consumer, purely through an in-app messenger. It took us a while to get there. We started with some variations of other communication vehicles, streaming and call. What we realized is that they require undevoted time, which drastically increases the logistics behind the interactions, which drastically increases the time it takes for a producer to service a consumer in any given month. Anything that requires undevoted time on behalf of either the consumer or the producer drastically increases the volume relative to time of that relationship. Now, that's not to say we won't look at adding those back down the road, but it would likely be an add-on where you're paying more for the time or you're getting FaceTime at the beginning of every month, for example.

But back to the user float one, the engagement is driven, the coach is then building a monthly fitness plan for the consumer and assigning a weekly promise. The promise is designed to drive keystone behavioral changes, so I either will or will not do something for one week, actually five days. That is usually not geared towards exercise, but towards one of the other pillars of a healthy lifestyle, nutrition, sleep, or stress management. From there, we're tracking all the data we can, both through wearables, Apple Health Kit, self entry, which populates a producer dashboard and the producer's driving communication, answering questions, giving feedback, encouragement, modifying workouts, so on and so forth throughout the course of the month. The process or plan lasts for one month and then it repeats itself. That's the, as basic as I can put it, user flow.

I believe that one of the most important things that a coach has to do is insert themselves in the decision-making pattern before the depletion of willpower reserves. In the event that you don't live up to a promise, the coach is learning a lot, right? The coach is learning whether the promise was too strict or too hard. The coach is learning how the consumer looks at the promise. They might need to reinforce that. As I think Alex talks about in your podcast a bit, rules and regulations are incredibly important ...

Patrick: [00:35:39] Enforcement...

Brett: [00:35:40] Yeah, platform business models. You think about certain things that at the beginning and from the onset of companies might seem crazy, like Twitter's character limit or the fact that you couldn't zoom on Instagram photos early on, but things like that, ultimately, go on to identify the model and drive the brand. For us, promise is incredibly important. I believe it's the most important aspect of the overarching promise or process, and always will be even when we add other stakeholders potentially and other monikers of coaching, such as nutrition and so on and so forth.

Driving engagement is everything, because that's, what's going to accelerate the relationship and that's, what's going to drive the accountability. We're constantly trying to find ways to prompt engagement and spark engagement, we like to say, because we think that does the two most important things for us. It makes the process more customized, right? Because the more the coach knows, the more information they have, the more data they have, the more coachable the consumer becomes. The process becomes more customized, but you're also driving the strength of the relationship, so that the compliance to process likely increases exponentially.

At the beginning, we're really trying to work with our coaches to ask certain questions. We don't necessarily know what all those questions are, but we're paying close attention to which questions are getting better answers. We believe the sky's the limit relative to how we can offset the human-to-human engagement through different variations of machine learning and AI that make it easier for the engagement to take place. We believe that as it relates to the health and wellness industry, that is so focused on empathy, the best use cases for machine learning and AI are actually in enhancing the human-to-human relationship as opposed to replacing it.

Unlocking Opportunity for Coaches

Patrick: [00:37:31] Yeah, you see that everywhere. It's true in finance too that there are these firms popping up that do a combination, which are more successful than one or the other, which is really interesting. Talk about the opportunity for coaches. That is a, maybe the key early driving force is getting quality coaches, sort of like Uber regulated their drivers by making you rate them early on. I think it's interesting. I don't think you actually are forced to rate them anymore, which is a change. Early on, you had to, it was a two-way rating system. It ensured quality both directions. One, how do you recruit really good coaches? Two, given that obviously bad coaches will make their way onto the platform, how do you get them out quickly?

Brett: [00:38:21] To start off, just to go over the existing ecosystem a little bit, there are about 350,000 health and wellness professionals in the US. Believe it or not, they're making just $11.57 per hour when you account for the fact that they're working over 11 hours per day. They have on average about four hours of unused time during the course of any given day.

With that said, we firmly believe that a personal training certification doesn't make a good personal trainer. It definitely doesn't make a good digital coach. We don't yet know what personality traits and types make up a good digital coach. We'll find out. It won't take us that long. At the beginning, we're getting our coaches from our partnerships with the gym. Gyms that we're partnering with are giving us explicit access to their coaches. We're also enabling non or coaches or trainers that aren't partnered or don't work for any of our gyms to join the platform, but only if referred from one of our existing coaches.

We're definitely trying to maintain a level of exclusivity for our coaches. We believe that depending on how much time the coach has, a coach can service roughly 40 to 60 consumers in a given month again, depending on their schedule and how much time they have, but that's just on average. It should take a coach about 60 minutes to service a consumer in any given month. All of which is undevoted time for the most part. That will go down exponentially at scale, because the coach is able to actually store workouts they're creating. Not all workouts will be built from scratch per se. I mean, if I'm training Patrick and I have a new client who has similar wants and needs to Patrick, I might just amend Patrick's plan to work for Tom, for example. The time it takes to build plans will likely decrease.

Patrick: [00:40:13] That's like, it reminds me of the GitHub example where a key component of the platform business model is providing tools in the middle, right? Come on the platform, we're going to make what you do easier and more scalable. That's my best example. What, if any, I guess rating service, will there be, or I guess you could, just a rating could almost be implicit in like who sticks around. If one coach has a bunch of people that aren't lasting at all, that could just be information or data enough, but how have you thought about that in terms of the backend, once you've got a coach on board, making sure that the quality stays high?

Brett: [00:40:48] We're not looking at just a general rating. We think that's a little too vague to really pull out any valuable insights. We are paying very close attention to certain dynamics of the relationship, like response time, like time in app, like a rating of a plan, for example. As we grow, we'll be able to again, make better matches. If we find out that the consumer wants response time of two minutes, we will then be able to match them with a coach who has an average response time of two minutes. Whereas if a consumer is more concerned with the complexity of a workout plan than they are with response time, then we know that and we can do that as well.

We think that's super important for just driving utility to the consumer, making it worthwhile for the coach, but also as we get bigger and as the opportunity expands, giving more information to referring entities and potentially payers as well. We know that a large corporation or a physician group would be a heck of a lot more likely to use our platform as a referring agent, if they actually have data and insight into who the coaches are going to be, as opposed to just, "Hey, use this platform and the platform matches you as a coach," the referring entity, whether it's a gym, a physician group, a corporation can actually pre-vet the trainers that will be available to the people being referred.

Now that gets really special when we start to talk about different subsets of critical care conditions, for example. When we can actually prove that Cecilia has a proven track record of working with people who are at risk of getting type two diabetes or who have Lupus or digestive discomfort, for example, and so that's where, you know, we believe that the data compounds and gets really special.

Patrick: [00:42:39] How do you think about the value of the data? We're in the stage now where software's easy, right? It's very easy to build, change, pivot around software. What becomes really valuable in these platform companies is the networks. Networks are enormous moats and are very hard to bust once they're big. Data is another key thing that can be packaged. It can be sold. It can be used to do other things that you never expected. What kind of data, or how are you thinking about collecting data and how that might be part of the business side of this?

Brett: [00:43:10] Yeah, so when I think about data at this point, we have more and more access to it. The question becomes, "What are you going to do with it?" Our objective is to use it, to enhance the experience for all of our stakeholders, potentially drive more stakeholders into the equation.

We're very focused on the producers at the beginning. We think that health wellness professionals are very underserved. One of our main core values is working for health and wellness professionals to enable them to better serve more people. We're doing a lot of stuff with them on the scheduling front, making their lives easier. We're allowing them to work with their clients free of charge, which is great for us because hopefully it gets them in app more. It also will likely be able to drive incredibly powerful trigger. If we find out that you're trending in a certain way, relative to nutrition around mid-morning on mid-week days, we can actually drive messaging to the coach that prompts them to drive communication to the consumer.

We're not yet really thinking about data and how it might be important externally. Though, in the digital coaching space, in a variety of different verticals, we've seen data plays where pharmaceutical companies are buying digital coaching companies to drive communication that increases medication compliance, for example. Now, we will likely be put in positions where we have the opportunity to work with some companies like that, but that's not really on our radar. At the beginning, we just want to aggregate the data that's already there between us and the device and the consumer and the producer, also from the gym, to improve the core competency of the coaches, improve the Ladder user/gym member experience, improve the consumer gym/member/trainer experience. There's all these preexisting relationships that through productizing them, we now have access to a tremendous amount of data. We just want to use it to make all of our existing stakeholders lives easier and better.

Patrick: [00:45:32] How's it going to work with gyms? One of my favorite things in the platform idea is tapping or using existing networks rather than trying to start from scratch. Obviously, there's an enormous network of gyms and the trainers who are so key here or the coaches or who are so key, a lot of them are operating in that ecosystem. What does that look like early days? How do you partner with them?

I had a conversation, actually the podcast that's coming out, I guess the next couple of days on Tuesday, talks about this idea of complimentary assets, so the ability of a new business to use existing assets outside of its own asset base as net positives for itself. Gym seemed like the obvious one here. How do you think, and you mentioned your dad knows all the gym owners, you know all the gym owners. It's an ecosystem and a network that's super valuable that sounds like everyone can benefit from this idea. How do you think about gym partners? How are you going to cultivate those relationships? How will it work early days, the details around the gyms would be really, really interesting?

Brett: [00:46:31] Yeah, so the relationship with the gyms is something that I paid really close attention to. I didn't believe that any business model even like this could work without the buy-in of the gym. We were very thoughtful about how we approached the gym owners and how we were able to bring them into the mix. Where we're at now is we're creating partnerships with health clubs. We've partnered with some of the largest health clubs in the country who are giving us explicit access to their trainers but also working with us to market our solution to their non-training members, so the 90% of their members who aren't working with the trainer, as well as all their former and prospective members. Assuming the industry average of a 50% annual attrition rate, a health club that has 3,000 members at any given time, but has been in business for 10 years, likely has access to between 175,000 and 200,000 people or data points that at one time they paid to acquire, but they're only monetizing 3,000 of them. There's a huge opportunity for the gyms there.

When you look at the health club business, aside from real estate, the only KPIs that actually matter are average dues per month and average dues per member per month. We know that a health club that charges an average order volume of $20 will likely have an average dues per member per month of around $23. The majority of that delta comes from the 10% that are buying training. There aren't a heck of a lot of other revenue streams that account for much. We know that retail accounts for roughly 40 to 50 basis points. The gyms have a very difficult time further monetizing their members above whatever the average dues per month is.

Our platform includes a rev share to our partner gyms in which case we're driving what could be an additional $5 per month, which for a health club that's charging $20 per month, that incremental revenue could be incredibly significant. More importantly, it's creating relationships that make the consumer more likely to buy in-person training, so potentially increasing the club's personal training penetration. Most importantly, it's just creating genuine engagement, which creates a much higher lifetime value member. We know that the average lifetime value of an engaged gym member is just over 60 months, whereas an unengaged member just under nine months.

Franchise vs. License Model

Patrick: [00:48:58] Let's talk a bit more about CrossFit. It's an interesting lens through which to think about both the community and the business side. You mentioned there are elements that maybe you don't like. Obviously, there's community elements that are undeniable. I actually want to focus on the, to start, the business things that you think may not be sustainable. Obviously, that's relevant for how you're thinking about building Ladder. What is their business model? I'm not sure I even know it. I think it's a franchise model, but I'm not sure. What is their business model? How has it grown or changed over time? What is and is not sustainable about it?

Brett: [00:49:33] Yeah, so CrossFit is actually a licensed model. If it was a franchise model, I would be a lot more bullish on the long-term sustainability. One of the issues that I've seen and at my last company, we worked with CrossFit facilities almost exclusively, and we were able to partner with about 25% of them in a year and a half. We got really into the weeds of how they run their businesses. One of the issues that we saw is that the number of boxes or physical locations was growing exponentially faster than the number of CrossFit members. The barrier of entry to open a CrossFit box is very low. The community is creating a tremendous amount of competition that is not great for any of the individual stores.

You take a CrossFit box in a certain location that was early and got up to a couple of hundred members. Of those couple of hundred people that were there at the peak, 50 of them became literally obsessed with CrossFit. Three or four of them opened their own box or store. They weren't willing to move to do so. Now all of a sudden, that actual group of 200 people is spread out between five different stores. It's tough because there's no aftermarket, there's no liquidity or ending for an owner. If you're not willing to put the hours in to operate it, there's not a heck of a lot of money to be made. Opening one up, you're just buying yourself a job with a heck of a lot more exposure than you'd get if you were to just get a job. There's a lot of liability there.

I'm not all that bullish on the long-term prospects on the business side. I think, at last count there were just over a million and a half CrossFit users or members globally, which if you look at that against the rest of the commercial fitness industry is, I think there's about that many gym members in Massachusetts alone. It's not nearly as big as a lot of people think it is. Yet, we see the CrossFit games on TV and everyone knows what it is, because it is so dynamic and it is so different. When you see regular people push themselves to these crazy limits. The shape physically that it gets people in is undeniable.

The thing that I love about CrossFit is that from a health and wellness business standpoint, the name of the game is retention because you have to keep people along enough so that they can see results. There's a tipping point when people actually start to see physical changes to their body, they start to become addicted. The question becomes, "How can you keep them long enough to, to get them to a point where they actually see those physical changes?" It takes three to five months.

CrossFit has been able to create that community, which in my opinion, drives a level of accountability that is second to none and keeps people a little longer than most other applications have. Then they truly do become addicted. Their whole friend groups change and the way they eat and literally the way they live their lives. If you have ever for me, I remember not seeing people that I went to college with, in a decade. Then they got into CrossFit, and it's like a totally different person. They don't look anything like they did before. They don't act anything like they did before. The fact that a small business that's less than 20 years old, I think, can actually have that effect on people is pretty significant.

Patrick: [00:53:14] Talk about the difference between the function and attractiveness of a franchise model versus a licensed model. I'm just curious. That will become relevant again when we talk about gyms a little bit later, I think.

Brett: [00:53:24] Yeah, I think if they had gone with a franchise model where the barrier of entry was a little higher and there was some protection relative to territory and there was more structure relative to the operational structure of the businesses, they would have been able to create a brand that was a little more palatable to people. They don't give you a heck of a lot of guidance. You get a certification. You pay a certain amount of money. You get that CrossFit brand. You can put it on your ...

Patrick: [00:53:51] It's basically, the licensed model is basically paying them to be able to use the name. I mean, there's really nothing more to it than that.

Brett: [00:53:57] Correct. You don't have to buy anything that they tell you to buy. You don't have to use any products they tell you to use.

Patrick: [00:54:05] Whereas the franchise version would be, like you said, maybe more expensive. You've got to buy this. This is your menu of options for equipment. We sell it to you. Just more higher touch.

Brett: [00:54:15] Yeah, and they also, in most franchise situations, to teach you how to run the business.

Patrick: [00:54:19] Right.

Brett: [00:54:20] They tell you what you should expect and work with you to actually operate. Whereas in CrossFit, you're buying the right to use the name. You're sent off to your own devices, which in a lot of ways I think has accelerated the early growth because the franchiser CrossFit has learned a lot from their successful franchisees. But in doing that, they put a lot of other franchise or licensees in a position where it would have been tough for them to succeed. They probably didn't have the wherewithal to operate a business at that time. I think that's tough. I've seen a lot of CrossFit box owners that have put a lot of money and effort and time into their businesses. The passion wasn't enough to create a sustainable business just because they had never been in a situation like that and didn't have the operational expertise that they probably would have needed.

Patrick: [00:55:10] Talking about audience building. The hardest days for any platform company are the early ones, prescale. Are you going to focus on particular geographies to start, go city by city, like Peter Teal suggest, start in a niche market and completely scale-out there and own it and then move laterally? What would be the strategy there? Whether or not it's in one small market first or a broader strategy first, what will be the methods for acquiring customers for building an audience? What types of acquisition strategies do you think will work?

Brett: [00:55:43] The audience building is just so important to me, right? I come from a background of buying something for one and selling it for two and not being an engineer or previously not being a technologist. I was always fascinated with people build these products and hope people use them. That was never how we looked at it. We always knew the product had to be second to none, but we didn't believe that was enough.

The audience-building strategy is fairly intricate for us. Working with the health clubs enables us to create a locally-based supply and demand. We know that in platform, business models, that's incredibly important. You have the chicken and the egg for Uber. If there aren't enough drivers at the beginning, the riders can't get picked up in an ample amount of time. If there aren't enough riders, the drivers can't make enough money. A lot of companies subsidize producer compensation at the beginning. We believe we have a very unique opportunity to solve this from the onset by partnering with the gyms.

We will have somewhat of a geographic approach in that we're Boston based, so the majority of our boots on the ground marketing initiatives will take place in Boston. We're also very closely tied to New York, so we'll roll out there secondly. We also have other parts of the country where we have health club chain partners, like Little Rock, Arkansas, which we probably never would have gotten to in the first, maybe a couple of years, but we have a relationship there with a health club chain that services the overwhelming majority of members and trainers in the given market, so we can roll out there as well. It's a combination of rolling out city by city but also rolling out gym partner by gym partner.

Patrick: [00:57:22] When will that happen? What's the timeline for, let's say, trying to build a liquid, I'll call it a liquid market where it's easy to, the supply-demand balance will be there at some sort of scale. Let's pick Boston, for example, where someone in Boston that's a consumer that wants to find a coach can do that and there will be no friction in terms of quick matching, a liquid market, meaning there's different types of coaches.

I want to get back to some of the questions that you ask people to match them to a coach. I think people would just be really interested in what you care about when trying to find a good coach for them in terms of outside of the gym strategy. You've got a captive base to begin with, which is a big advantage early on, but for just the Joe Blow on the street that doesn't have any sort of affiliation with the gym, someone that might be interested in training or has thought about it, your target consumer, right, that you want to convert maybe even bring into the gym ecosystem for one of your partners, how are you going to get their attention? What's the early strategy there?

Brett: [00:58:23] Yeah, so our direct-to-consumer audience-building strategy from the onset will be mostly through social, but also through a referral engine. Given that we are letting our coaches work with their existing clients free of charge, we do believe that will turn into a viral coefficient to some extent. The average personal training or average personal trainer in the US has about 18 clients at any given time. They're only retaining them for like I mentioned, about 14 weeks. If you look at a trainer and that's been training for 10 years, they likely have access to a pretty significant pool of people. We're working with them in a lot of different ways to seamlessly bring on not only their existing clients but also their former clients as well. Then like any delightful product, just trying to drive a referral engine through our satisfied users.

We do have to pay attention to the growth relative to consumers and producers. Though we believe we have a unique opportunity to manage that better than most platforms, we can't just go gangbusters on the consumer side from the onset. We do have a lot to learn at the beginning. We believe we know what data points we should be paying attention to. We've set up the product in a way that gives us an incredible amount of transparency to those things. At the beginning, before we can actually take the training wheels off and let platforms do what they do, which is just scale and drive network effects and compound, we need to make sure the product is where it needs to be.

Patrick: [00:59:56] Who are the big competitors, people that have started, I mentioned this to someone they're like, "Oh, it looks like Trainer Eyes," or something that they use. Who are the competitors that have attacked some dimension of this whole thing? What have they gotten right? What are they gotten wrong?

Brett: [01:00:10] Yeah, so there's probably 10 different companies that are still in the space. Maybe another 10 have entered it and since left. On the nutrition side, there are a couple of companies. Vita is doing a good job. Noom is doing a good job. They're both working with a different producer set. They're working with registered dieticians and nutritionists. Foodocracy is doing something similar. They were acquired about a year and a half ago, though. They're not making commoditized matches.

No one is working with the commercial fitness industry. Trainer Eyes is cool. I like what they're doing. However, their business model is a lot different than ours. They charge the coach. We don't necessarily think that's as scalable. We don't think coaches are the best salespeople. If you're tasking coaches with selling the opportunity, we think you're taking them away from their core competency. As it relates to our model, allowing coaches to work with their existing clients for free and then marketing to the consumer to drive them more clients, first on a digital side and potentially on the in-person side as well, and doing that with the acceptance of an ability to work with the commercial fitness industry who has access to not only the majority of the coaches but also the overwhelming majority of prospective users or consumers as well. There are some competitors in the space. I believe our biggest competitor hasn't been born yet as a company that we'll see, come about down the road, which we're excited for. I think that's, something that's inevitable, but yeah, that's how I look at it.

Patrick: [01:01:46] What do you think about gyms themselves as a potential competitor? Why hasn't the gym done this? I'm always interested in the, back to that idea of complementary assets that when you're using a complementary asset, like a gym in this case, as part of your business model, and almost like if you're too successful or your margins look too good, why wouldn't they just say, "Well, we're just going to do this ourselves." Do you think that gyms which are going to be, and obviously early boon, could become a threat or a competitor down the line?

Brett: [01:02:18] I think there will eventually be gyms that try and do this. We've already had some conversations where the gym owner says, "Well, why don't I just do this?" My response is always, "Go for it."

Patrick: [01:02:31] Yeah...

Brett: [01:02:33] Platform business models need real massive scale for network effects that come into play or they're not cool. They don't work like they can. There isn't a gym or gym chain that is big enough, in my opinion. With that said, there are a couple that I know are going to try and do it. I think there's an asset to be created there that can potentially add value to the gym, but not necessarily as much value to the producer and/or consumer. I always look at Instacart and what they've been able to do with Whole Foods though, with the recent Amazon deal, who knows what happens there. The product at scale has to get inherently better to both sides of the fence. I don't know that the gyms have access to enough scale to enable that. I envision a lot of them trying. I think if we build the brand that we're trying to build in and transparently show these gym owners that we actually exist to make their lives better and easier, we can stay the course and continue working with the industry. That's very important to us.

Patrick: [01:03:37] How do you think about brand? This is something I think about often, especially in conversations in the venture world where early on, that's one of the variables you can control most or at least be really thoughtful about. How do you think about, first before we get to Ladder, like generically, what does brand mean to you? How would you define it? How have you been deliberate about trying to shape Ladder's brand early on?

Brett: [01:04:01] Yeah, so I think brand is arguably the most important though, most difficult to create aspect of any business. I think the brand is ultimately how people identify with who you are, what you're doing and why you're doing it. It's interesting, because in the fitness industry, as a whole, both commercially and direct to consumer, we see brands market themselves in certain ways through bodybuilders and bikini models. There is so much low hanging fruit. People care about their health and wellness or at least how they look. At times it can be somewhat easy to transact opportunities into the space. I think the result of that is a shortage of great brands. We definitely, I often say, if you look at the health club spectrum with Equinox on the far right and Planet on the far left, we think we fit nicely in the middle when we look at the product we're trying to build.

Patrick: [01:04:59] What has been your favorite story thus far? Ladder is two years old, right? What's been the, if you had to hone in on one individual experience or story, what's been most memorable so far?

Brett: [01:05:11] That's tough. I honestly just love the process, like the good stuff and the bad. This part of it and people that I spend a lot of time with often say, "Don't forget these times, because you'll never have them again." No matter how big the company gets, this will always be probably the most special part of the company. Right now, Ladder is not much more than an extension of my team and myself.

One of the things on the fundraising side that I think is interesting is that before you have a product, so now we've gone through a few betas and we've got a few hundred users and we have a team, but at the very beginning, when you're telling people your dream and you're articulating the story, now, people will tell you that business isn't personal, but it's so personal. If someone doesn't want to invest or help, whether that's time or money, that's basically them saying, "I don't think you're going to be successful," which you can get pissed or you can ask them why and try and learn. I'd be lying if I told you that I don't have a list in the back of my head of people that ...

Patrick: [01:06:25] You want to prove wrong.

Brett: [01:06:26] Yeah, it's just like the people that didn't give me at least the time to help and not necessarily with money, right? You try and raise capital. I have a very unique view on raising capital, especially from angels. If someone's giving you money that is theirs and they can do anything with it, so I don't necessarily get upset if people don't invest. What does cause people to go on that list is if they won't give me the time or the mind share to actually consider the opportunity and give me feedback good or bad. Even if it's bad feedback, you have the opportunity to correct that and build a relationship. I think that so much of this is about building a team and building a group of people that you can learn from and communicate with. I guess the whole process is great. It's very competitive, which I love. I don't know that I could pick one specific thing or moment though.

Patrick: [01:07:27] I love it. Well, what we're going to do is chronicle this process, right, and watch a company try to scale, which, there's such an appetite for this nowadays. I certainly feel it listening to something like how I built this every week. Everyone watches Shark Tank. I think there's this, dynamicism and this spirit that people want to watch something like this grow. To my knowledge, there hasn't been something like this that's chronicled that growth. This will be part of an early series of these things where we learn about business, we learn about new kinds of business models, a particular industry in this case, the healthcare, fitness, wellness one. This is going to be a blast. Thanks for round one.