Posted: 3:40 p.m. Monday, Nov. 18, 2013
By Allison Fass
The SoulCycle founders talk about developing their business model and how they were able to fund their growth.
00:09 Allison Fass: So Elizabeth, you spoke about how you funded the company initially with the money from IZZE. How have you continued to fund growth along the way ultimately culminating in a partnership with Equinox two years ago?
00:21 Elizabeth Cutler: I think that that is just the trickiest thing. I have so much--I mean we have been there. To me, I don’t know where everybody is the continuum, but I would say, first of all, we had the beautiful timing of really wanting to grow in 2008 when things were not exactly as liquid as they are now, so congratulations. You are in a much better position than we were. But we went to J.P. Morgan. They gave us a credit line of $100,000, so I would definitely start with some bank. Smaller banks tend to do better than bigger banks, but that was one avenue that we got a little bit of cash out of. American Express was a phenomenal partner for us. Every time we needed to up our credit limit, they were there, and truly we would not exist today if weren’t for American Express. So really, they’ve got great small business abilities to help you leverage. Again, I think the other part of it is friends and family. I mean even--God bless Allen. The poor guy had spent his five best earning years at Lehman Brothers to see them go down the toilet. Julie and I would call him like, "There’s still money in the bank account. Can we borrow some?" And he was like, "I guess so." because we were at a point where the market had tanked and that was good for real estate, so we were able to take on some leases that we wouldn’t have been able to afford otherwise and we needed the money for those.
01:43 Fass: It must have been especially hard during the recession to get funding.
01:46 Cutler: It was terrible. It was absolutely terrible. I mean I don’t--we talk a lot about development of people and coaching and really helping people to put their best faces forward for the business and for the brand and to help turn it around and keep it positive and all that. I mean I had a few moments with some bankers that were not my proudest.
02:06 Julie Rice: And let me really just clarify. At the time where we needed to borrow extra money, our business was successful. We were cash flowing. By any standards, the business was performing the way that we had--way more than we had anticipated that the one studio which we had really set out to build would. We were cash flow positive. Anybody could look at our back-of-the-napkin business model and see that it was clearly working. If we had just wanted to sit still and continue to run that studio, it would have made money. At that point, we were looking to expand because we were doing great--and take advantage of the real estate situation. Even though we had what we considered to be a successful business in a time where new businesses were going out of business, we still could not borrow the money.
02:49 Cutler: And there’s that place where you get to. It’s called Death Valley. You have a successful business, but in order to grow--you are too small for the private equity and the venture capital. It’s an awkward place to be, but there are resources out there.
03:04 Fass: Let’s talk about the business model. Elizabeth, could you explain the pay-per-class group fitness model and why that has been fundamental to your success? I would have thought a subscription model would be more lucrative, accruing revenue every year.
03:20 Cutler: I mean we made a decision very early on. We just felt like, first of all, you value what you pay for. So if you come in--so we have a pay-per-class model. Every time you sign up for a class, you pay for it. There is nothing that holds you beyond that particular day. And we sort of loved it because - Julie always talks about it. She’s like, "If you walk into the studio at 6:30, the person who teaches at 6:30 has like set the bar here. And then the 7:30 teacher brings the level of energy up here. And by the end of the day, you can feel the energy in the studio." We just felt like that was a really good thing culturally for the business, where we have to up our game. We’ve got to bring it every single day. It is on every single person who works in our organization to bring their A game every minute of every day so we are constantly upping our own game and constantly keeping ourselves invested in what the experience is for the rider. And it’s fun. It’s--I mean I like it!
04:14 Rice: It’s a real challenge for us. It would be much easier to just sit around every month and wait for people’s direct deposit to clear on the first, you know. Instead, we really look at--every class is a mini-experience. It’s curtain up and curtain down, and you really have to make sure that all of your employees from the front desk to the instructor are bringing it each time. It’s actually a much more difficult and challenging way to build a business, but, like Elizabeth said, it really keeps everybody on their toes and it keeps us evolving.
04:43 Fass: And that’s the reason subscription even high-end gyms don’t necessarily put a lot of resources into their classes.
04:50 Cutler: Well, that’s a fundamental piece of it. We decided that we were going to make - where gyms have to provide experiences for their members and it costs them money and they don’t really want to spend money on it and it’s a drag for them, we felt like if we could--that’s exactly right. If we could focus all of our attention and resources on delivering an experience in that room that was unique, we could really do something special. Since it’s our revenue generator, we were able to do that. What’s fun about it is, to the experience, we have created incredible training programs from soup to nuts, which you can talk about, that really do mean that people feel it when they walk in that room.
05:27 Fass: Can you speak also to the pre-registration model? Some people are spending $3500 a month just so that they can get ahead of the pre-registers.
05:42 Rice: Noon on Monday has become the pressure point at SoulCycle. When we first started out, we decided that we would create--Elizabeth really worked hard on the technology to…
05:55 Cutler: Yeah, we just wanted--at the gym, previously before we started the business, if there was a good class you would have to show up 90 minutes early and then you signed up for your class. I’m like what do you do for 90 minutes before this class starts? So we just felt like if you had an online reservation system where you could plan your week, you could show up five minutes before class. You could get on your bike and it really would be the definition of an efficient workout, as opposed to cooling your heels while you are waiting for something to start. So by the time that started rolling, we…
06:21 Rice: Yeah, in the early days when noon on Monday would come, we would stare at the computer and we would watch one bike on, two bikes click on. When we got to 10--and then, it sort of started to become milestones for us when we would crash servers. Every six months we would start to get emails and angry calls at noon and say your server is down. We would call our tech guy and he would say, “You know what? You are too big for the server again.” It really became an amazing phenomenon. And then, when we were trying to grow and we were having real estate issues, we had just won the studio and we had become somewhat popular. Our customers started to get angry - our loyal customers, because noon on Monday had become very stressful. They were no longer able to get into the classes that they wanted or get the bikes. So Elizabeth decided to come up with the genius idea which we call Super Soul, which means, if you pay twice as much money for your bicycle, you have a concierge who calls you months in advance. You can sign up for all the classes that you would like all the way through the month if the schedule had been created. You can get a general idea of where you would like to sit in the room. People love it. It became really worth it for people because people really became engaged in the activity. People view it like it’s personal training. You do get that kind of attention in our room, and so it becomes much less stressful for you to just buy this package that allows you earlier access to the system.