For Peloton's first two years in business, venture capital investors didn't get it. The company's founders struggled to convince them that blending stationary bikes and streaming live video classes would work. It had to cobble together money from a network of more than 200 angel investors to get off the ground.
But six years and a quarter of a million bikes later, the company is the toast of Silicon Valley. On Friday, Peloton announced it had raised $550 million in financing from prominent investors led by TCV, a firm known for investing in Facebook, Netflix and LinkedIn. Peloton has now raised $1 billion and is valued at $4 billion.
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The combination of hardware and software that initially turned off investors is now viewed as an advantage. After Peloton sells customers a bike for $1,995, the company charges a $39 monthly subscription for the live video classes. Jay Hoag, general partner of TCV, compared the business model to Apple's iPhone and App Store. And he said Peloton's repeat revenue from subscriptions reminded him of Netflix, where he's a board director, and of Spotify, a TCV portfolio company.
"They have a similar-sized opportunity to reshape fitness," he said.
Peloton is on track to bring in $700 million in revenue for the fiscal year ending in February, said Jessica Kleiman, vice president of global communications for Peloton. It plans to go public in 2019.
Peloton's slug of capital comes during an influx of so-called mega-rounds of funding of $100 million or more. In July, 55 companies raised mega-rounds, the highest amount in the last decade, according to data site Crunchbase.
Peloton's new influx of money will partly be used to fend off new competitors. Investors, seeing Peloton's fast rise, are fearful of missing out again on an exercise start-up.
Flywheel, NordicTrack and a brand called Echelon all offer stationary bikes with video classes. A start-up called FightCamp is pitching itself as "the Peloton of boxing." And Mirror, a company making home fitness devices that stream yoga and Pilates fitness routines, has raised $13 million even though its product has not yet gone on sale.
The money going to Peloton will also be used to expand Peloton's offerings. Fitness is a faddish industry, as anyone who owns a dusty set of Tae Bo tapes can attest, and indoor cycling is not immune. In May SoulCycle, a boutique indoor cycling company, withdrew its plans to go public, citing "market conditions."
Peloton has added new categories of classes, as well as live music and the ability to give fellow riders a digital "high five." The company said 96 percent of its customers remain subscribers, and its bikes are used an average of 13 times a month per household. Some of its fitness instructors have become mini-celebrities with loyal followings.
This year, the company also began selling a treadmill called Peloton Tread for $3,995. The treadmills will ship in September. "We think Tread will be as big, if not bigger, than the bike," said William Lynch, president of Peloton.
The company has plans to expand outside the United States as well, including in Canada and Britain, starting in the fall.
The company has not yet shipped bikes overseas because it hasn't had music licenses in other countries. That hasn't stopped some enthusiasts from getting their hands on them. Last year, according to Mr. Lynch, a duchess in Sweden sent the company a photo of a bike being delivered to a countryside chateau.
"We had this tsunami of demand from Europe and Canada from consumers asking if they could get the bike," he said.
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