Inside Ergatta’s Game-Driven Model and Two-Year Profit Streak

0:00The core strategy was to be the leading providers of gaming content for cardio equipment. That was the North Star from day one. Welcome to Shopify Masters, your companion for starting and building a business. I'm your host, Adam LaVinter. Many of us start a cardio routine with good intentions, only to drop off for any number of reasons. For Tom Ouellette, the problem was boredom. So he built Ergata, a connected rowing machine with game-based workouts designed to keep users engaged, competitive, and coming back. We went from tens of thousands of houses around the world to hundreds of thousands overnight.

0:34overnight. The company since inception has raised 35 million, stayed profitable for eight straight quarters and partnered with iFit to bring its content to bikes, treadmills, and more. Joining me now to talk gamification growth and the future of fitness is Tom Ouellette, co-founder and CEO of Agata. Tom, welcome to the show. Thanks for having me on. So take me back to the origin story of this. You had this simple realization that people wanted to work out, but cardio is boring, if I have that right? So for me personally, I don't feel great if I don't break a sweat every day. I don't sleep as well.

1:10I don't have as much energy. I get bored at work. So I had struggled in my adult life to maintain a regular fitness habit. The gym kind of was inconvenient and boring. I wasn't a fitness class person. And what I used to do is just run outside for half an hour every day before work. And that did it for me. That was perfect. That was efficient. I enjoyed it. Great. Then my knees started to hurt and I kind of was out of luck and needed a new thing and got a rowing machine for my home that worked, but it was incredibly boring. It was hard to maintain a habit. It was kind of 30 excruciating minutes in the morning.

1:41And that was kind of the seed that led to the idea of gamified content to entertain you, motivate you, form a habit. But then more broadly, like most Americans know that they should work out regularly. Most Americans don't work out regularly. And the gap is boredom or lack of enjoyment or lack of motivation to actually do that, to work out regularly, break a sweat regularly. And that was kind of the market gap that we were ultimately attacking. So you're almost building this to solve your own problem, but finding sort of like TAM, a total addressable market, your ideal customer base is another challenge.

2:21So how do you take this from like idea in its inception to something that actually goes to market? Yeah, the way I see it is just like the spark from my personal life was just like an idea. The way that we researched and fleshed out the actual business idea, beyond the obvious, right? We talked to industry experts. We like look at all the competitors in the space. We look at brands that are doing similar things. The most interesting thing we do is primary market research. So we spent six months segmenting the market and speaking to would-be customers and getting to know them and their needs and their fitness desires and the times in their life when they actually had a regular fitness habit and what motivates them and all these types of things.

3:04And we ended up finding a part of the market that was not addressed by current solutions, right? So our part of the market, they skewed male, they skewed psychographically, they skewed introverted, a little bit competitive. They generally struggled to find a fitness routine. And as we got to know their needs better, we figured out that we could address their needs with the tools of gaming. That was the aha moment. That was when we figured out we can actually not just identify a problem and a group of people that experienced that problem, but now that we understand that problem deeply, we think we can solve that problem with something that does not exist out there in the world.

3:44to summarize is a gaming experience that is attached to a cardio machine and embedded within that cardio machine that's designed to like entertain you, motivate you to get through the workout, actually have a real workout program and structure underneath it. And then critically have all the tools to help you form a lasting habit, to kind of give you a sense of achievement, a sense of satisfaction, a sense of motivation so that over time you keep coming back. What is the psychological link between gaming and motivation? And it's not as if you were first to market with this idea. I mean, Peloton, this is embedded in their DNA as well.

4:18You seem to be tapping into something different here. I think there's two things. One is like gamification. So like overlaying game mechanics onto an experience that is fundamentally not a game. Peloton does this really well, right? So a good example is streaks, right? So like when you're on a Peloton bike, you're not playing a game, you're taking a class, generally speaking, but then you have this streak overlay like i've worked out seven days in a row or 10 weeks in a row and then the concept that's at play there is loss aversion once you've like built up that streak you don't want to lose it so you just you're like i have to get on my peloton once today right so those are really useful mechanics that's gamification that we use as well but then the separate concept is like gaming right so like you are playing a game so when you get on an ergata you are playing a game like what you see on screen is a game like you have an avatar you are taking on bosses or opponents you are competing in a race you are hitting targets avoiding obstacles etc so we do both of those things and the the kind of academic foundation that it sits on i would say is behavioral economics and psychology the little things that trick human brains into doing things that they don't necessarily want to do it kind of tools to manipulate humans into doing certain things is what we're doing.

5:36So you guys are seven years in, if I've got that correct. Yeah. And going back to the sort of timing of when this goes to market, pandemic hits in early 2020. What does that do to the demand side of your business model? From a demand perspective, it clearly helps. Like we didn't have a good before and after. We launched on March 20th, 2020. So, you know, there wasn't a clear before and after there, but it just clearly helped. Like you could see, you know, everyone that bought an ergata, we sent a survey to that was like, how did you find us? Why'd you pull the trigger? So you could just see qualitatively that it was, you know, I'm trapped at home.

6:12I, my gym's closed down. I have to work from home all day. I'm stir crazy, but I can't go outside. You know, it was clearly related to COVID and that was clearly a demand tailwind. And you start with rowing because I guess you could have started with treadmill or bike, But rowing is what? It's different, right? There wasn't a brand with this kind of experience with respect to rowing. Is that how you're thinking about it? There's a couple of things. First of all, yeah, there wasn't a leading brand that was doing connected fitness well in rowing. So Peloton was doing it in bikes. iFit Nordic Track was doing it in treadmills.

6:49There were other competitors there. So there was just some market white space in rowing. Rowing also at the time had real tailwinds, like the CrossFit kind of phenomenon, the orange theory phenomenon, like rowing is a better workout for you, arguably than running or biking. It's, it just has an accessibility problem. People like typically haven't done it, but because a lot of these cultural forces were getting people on rowing machines and experiencing the benefits of rowing, it was starting to remove that accessibility problem. So there were also some tailwinds there that, that were attractive to us too.

7:22How did you find the right manufacturing partner for this product. Yeah, that was such a key part of the process and went so well. And we found just the perfect partner. So, you know, we knew we wanted to manufacture a rowing machine. We knew we wanted it to look good. We wanted it to be affordable, but like price was not the primary consideration. And we wanted to de-risk that whole thing as much as possible, because we believe that the core value that we were going to create was in content and then bundling that content with hardware. We weren't trying to innovate massively on the hardware front.

7:56So we just wanted that to not break. So that led us to look in the US. There's only so many rowing machine manufacturers and fitness equipment manufacturers in the US, and we spoke to all of them. The water rower was the right partner for us for a number of reasons. But maybe most importantly, they were just open to it. They were open to a non-standard manufacturing agreement whereby We, for example, didn't have to put up a bunch of working capital up front because we were a startup. That was really helpful. We solved some of their business problems. They had a set of problems and a set of strengths and weaknesses, and so did we.

8:32And we figured out that we could structure a deal that solved some of their problems, solved some of our problems. And they were open to structuring that type of arrangement. They were in Rhode Island, three-hour drive away. We got to know them well. We built trust. And their machines are also just beautiful. They're made out of wood. They have natural water resistance. Like they're just unique, differentiated, beautiful machines that we just saw a lot of opportunity with. So it was a number of things, but it was most importantly, like how they approach the partnership and their openness to doing a kind of non-standard manufacturing deal.

9:04Did you know how to make these high ticket manufacturing deals come together at the time? I mean, I think the question for a lot of listeners is like, I've got this idea for a product of some kind that's high ticket. I don't have any experience in manufacturing. I feel like bringing a hardware product that's high ticket to market is going to be quite capital intensive. So I don't even know how to go about it. So what lessons do you think you could share on that? Yeah, maybe two. So one is just find the right people to advise you. So we just found a couple advisors that were experts in that, that we put on our cap table that weren't full-time employees and didn't want to be and weren't able to be, but helped advise us on this.

9:49And then thing two was just your founding team has to be oriented around the core strategic value that you're going to create. So the core strategic value we were going to create was in software development and marketing and packaging, basically. And it was not in hardware and manufacturing. So that was kind of off-piste from a strategy perspective. We had to do it, but we didn't have to do it better than everyone else out there. So there was a strategic fit with the founding team. So if we were trying to innovate from a hardware perspective, we did not have the right founding team. We would have had to have one of those advisors be on the founding team, be working full-time.

10:24So we kind of had a on strategy, off strategy, a line of thinking for different disciplines. And if it was like core to our business strategy, then we had to have full-time people on the founding team that knew how to do that, but manufacturing supply chain wasn't. So you can kind of plug those gaps with advisors, consultants, even just brands in a manageable way until you get to the scale where you can hire a full-time person to own that function. So what's the business model and what is the experience from the customer side of things? So if I purchase an Ergata rower today, I spend say$1 ,500 on the machine, it arrives at my door, is at the end of it or am I opting into some sort of subscription?

11:08Yeah, there's a subscription service attached to it. So 39 bucks a month. And then I believe it's 390 bucks a year. Most people offer the annual plan. So that gives you access to thousands and thousands of workouts, a whole suite of different games, single player games, multiplayer games, but also class content, scenic road content, a bunch of habit formation, tracking social competitive tools that are the real magic. So that's, that's a big part of the business models, the subscription obviously and then we have a an emerging new business line where we license our gaming content to third parties so our main partner in that realm is nordic track ifit and the experience from a customer perspective is you buy the rowing machine it gets delivered to you and set up for you and then when you turn it on you can either decide to subscribe or not subscribe um and if you don't subscribe you use it like an analog rowing machine you might see at the gym And you see metrics, you can store your data, you know, good.

12:03But if you decide to opt in or at least try the membership, then you get access to the whole content and software offering, right? Where you have a bunch of different workouts. You can choose a bunch of workout programming, the social dimension, the tracking dimension, all that other stuff. I want to double down on the licensing piece for a moment. So over 50 % of your annual recurring revenue now comes from licensing is a stat that I came across. I don't know if that's correct or not, but was this part of the whole business model canvas from day one or did licensing come later? Yeah, so that is the long term.

12:40That is the kind of two to three year vision is that 50 % of our revenue will come from content licensing, but that's not the current reality. More than 50 % of our reach comes from content licensing. So the humans that get on cardio machines and use Argata, more than 50 % come through the licensing side versus the rower side. But maybe just to clarify that. And then in terms of the strategy behind it. So the core strategy was to be the leading providers of gaming content for cardio equipment. Like that was the North Star from day one. So we started by bringing a rowing machine to market because we could do it with the capital we had.

13:19there was a kind of white space out there there wasn't a dominant player etc and then when we got to the point where we were ready to expand outside of rowing like we had made the rowing part of the business you know profitable and it wasn't growing at such a crazy rate that we could start to focus on other stuff we looked at obviously the treadmill and bike modalities because those are the two biggest cardio modalities and we could either go to market by by bringing an Argata bike and treadmill to market, or we could partner with folks that are already leading in the space and charge a licensing fee.

13:52So that was the decision making. And we decided to do the latter, obviously. And it was partly like the right partners came across that had huge install bases. And it just takes a lot of capital to bring a new treadmill to market and acquire all the customers to have hundreds of thousands of them out there. So that was kind of the calculus. Yeah. And I would think that a lot of the margin comes from that long tail subscription revenue. How sticky is the subscription itself? I would assume your retention has got to be quite high. Yeah, it's incredibly sticky. So, you know, Peloton's a publicly traded company.

14:27They publish their retention stats. They're like absolute cream of the crop in terms of consumer retention behavior. So their monthly net retention is like 98.5%, something like that. It changes around a little bit. We basically match them every quarter. Like when they publish their stats, we compare ours and we generally match or exceed theirs. So it's very comparable to Peloton. Do you think that that retention metric is a result of the value proposition or the experience itself? Or do you think that there's an element of, wow, I've just purchased this incredibly high ticket item. So I've got skin in the game.

15:06I can't think about canceling this. yeah i honestly both like one is just like the combination of great fitness hardware with really compelling and addictive content that's in your living room that you have no excuse not to use like is sticky and does create habits and like real value for for the customer but i think it's less the hardware lock-in and more the like nature of fitness right people want to want to work out and they want to work out more than they do work out. And the same thing happens with gyms is you'll sign up for a gym and you won't go for three months, but you don't cancel it because you're like, oh, well, maybe I'll start going next month.

15:47So there's like a virtue element at play that exists across the fitness industry with gyms as well as connected fitness. Yeah, and I know those numbers around gyms. The breakage is just incredibly high. They have huge uptick in January and by September, or only 10 % of those people are actually going through the turnstiles. So I get it. But I guess there's this element of, you know, this is in your face constantly. It's probably in your room beside you. So it's this reminder that, hey, this thing's still here. So that's got to be a motivating factor, right? It definitely is. I will say, like, there's a thriving secondhand marketplace of Ergata machines and Peloton machines.

16:29And like, if you go on Facebook Marketplace or Reddit or something, and we get new secondary carry market customers like hundreds each month. People do if they're really not using it and they're really not getting value from it, they will sell it in many cases. But yeah, it is the physicality of it sitting in your living room and you walking by it does probably play in our favor and in your favor as a customer, you know, if there's a constant physical reminder of your desire to work out or at least your previous desire to work out. makes total sense. Tom, how does the iFit partnership come together and what does that do to your distribution numbers?

17:05Yeah, totally. So this has been a great one. From day one, we've been talking to Peloton and iFit and Technogym and others about other modalities and just exploring it, being like, hey, we're building the best games in fitness. We've got amazing numbers in rowing. We do want to expand to tread and bike and others. What are you open to? and nothing ever went anywhere. And then when the bottom fell out of the industry in COVID, there were a bunch of new CEOs running these companies at Peloton and iFed and others. And iFed had a new CEO named Kevin Duffy and I met him at a conference and I gave him this spiel and he was like, yeah, let's do that.

17:44And that was the genesis of the idea is that he saw the value and he brought it about. It took a little while, but from his perspective, it's like, I run a big subscription business. I need to bring new innovative content to my members. I need to address different customer profile and persona types so that we keep growing. And I want to add new dimensions to the platform, like, you know, social competition. And then from our perspective, it was appealing because we could, just from a mission and strategy perspective, we want to be in as many homes as possible, helping as many people as possible, create fitness habits.

18:20And then from a revenue perspective and a like reach perspective, we could access the biggest connected treadmill maker and distributor in the world and reach all those people. And obviously there was a revenue figure attached to that. So for us, we went from tens of thousands of houses around the world to hundreds of thousands like overnight, you know, they don't disclose their numbers publicly, but they're the leading connected treadmill provider and treadmills are the most important and biggest category of cardio equipment. And so order of magnitude higher reach for us. And then obviously the brand exposure, the licensing revenue, the proof point, right?

18:57That brings our brand and our games legitimacy that like clearly establishes us as the leading gaming provider for other cardio equipment as well. There's a lot of benefits to both sides, but the reach increase was astronomical overnight. Very cool. Post-COVID, one of the things I've been thinking about is, especially in your space, is this correlation between return to work or return to office and return to gym or return to in-person fitness. What is the correlation? Is it incredibly linear and strong? Is it sort of like lightly correlated? What's the relationship? It's pretty correlated in terms of net new purchases, if that makes sense.

19:43So I'll tell you what hasn't happened is retention numbers have not gotten worse for us or Peloton. It's not like when you have a Peloton machine in your house and it's COVID and you're working from home, two years later, you're back in the office, you don't use the Peloton anymore. Like that's not been the case, at least from a subscriber retention standpoint, but it's been much harder to sell Peloton devices and Argata devices. So that's where it's really clearly shown up i still see and i still believe and i still have conviction around like most people most of the time want to work out at home just from a convenience standpoint but the the resilience and the return of in-person fitness of gyms of studios has been surprising to me um post-covid and has shown up most clearly and just net new units sold like falling off a cliff with return to work and all the other kind of post-COVID changes.

20:40Yeah. I think you raise an important point. I mean, I still look at commute as a major barrier to why people do or don't do things. And in the fitness space, certainly it's got to be true. I was looking at your trailer earlier and you've got this feature where you can compete against a rival. Like I can choose you, Tom, and then we can jump on an regatta tomorrow and we can compete or today. So it's cool that you're thinking about like, how do we create that feeling of being in person, but virtually or being at home? Yeah, totally. And it's also like another one of these game mechanics and psychological tricks, right?

21:16Like social comparison, right? If I do a workout and I do, and I do fine, and then you tomorrow do the same workout and you beat my score. And then you tell me that I'm like, Oh, I want to go do that again. And I want to beat your score. Like it just adds to the fun and motivation. And yeah, it also like brings the community concept that exists in gyms and studios, at least in theory, and brings that to the digital realm when you're kind of alone in your basement or whatever. It brings a lot of that energy. I do want to ask you about your unit economics, because one of the big differences between you and Peloton is you're not hiring talent, like you're not hiring celebrity instructors to teach the classes, right?

21:54This is a gaming experience. But that's got to be a P &L line item that's coming off the books that just adds to your profitability. And you've got eight straight quarters of profitability, which is awesome. Were you thinking about that early on? It wasn't the core thought. We were aware of it, but when you're doing venture-backed early-stage startup, you're taught to focus on addressable market and growth and where are we going to be in 10 years. And the cost structure, unit economics stuff is generally de-emphasized but like i looked back at our pre-seed pitch deck where we raised our first dollars and the underlying economic benefits of gaming were in our pitch deck like that was a thought and that's really played out like games cost a lot of money to build but once they're built they scale like software they scale like sass like we can release 10 new workouts a week and it's basically free for us we don't have to have talent we don't have to do the music licensing we don't have to have all the production costs we don't have the product we don't have the the big studio and in midtown manhattan right like uh it it does cost more money to like build and refine those games up front but once you make that investment it scales very easily to a number of different countries devices workouts etc so the economic shape is different than you know class content yeah so post seed uh you guys have raised over 35 million i think today What's been your experience fundraising?

23:22And if you look back, is there anything that you would have done differently? Yeah. Experience fundraising, it's hard. Everyone says it's hard and it is hard. It can be demoralizing and you kind of have to have your armor up and you have to get really, really excited and impassioned about this thing you're working on because you wouldn't do it otherwise. And then just like 99 % of the time people are going to undercut your idea and tell you why they don't believe it. So you have to kind of get the right emotional mindset to like get through it. But, you know, we got there, we were successful, that the importance of the macro environment is one learning, right?

23:56Like, raising money now is very different than raising money in 2021, which is very different than raising money in 2019. And there are like these in favor segments. Like right now, if you're an AI company, it's much easier to raise money than if you're, you know, growing machine company, right? Like, it's very trend driven, and it's very groupthink driven and very FOMO driven. So just being on trend matters a lot. And then the other thing I'll say is you got to keep executing. We weren't always able to raise as much money as we wanted to. And so we would just raise what we could. We would close the round.

24:32We would execute. And then 12 months later, we'd have like de-risked the business in some material way. And then fundraising would be easier after that. The only thing I would have done differently is maybe we, you know, I was taught and it seemed right to just raise as much money as people would give you. And I think a lot of the companies in our space were probably overfunded. In retrospect, it probably would have been advisable to raise it a little bit less money, right? Because when you raise$35 million, you have a certain set of expectations, you have a liquidation preference, you know, people are buying into a certain financial trajectory for the business that's hard to change after the fact.

25:09So raising less money retains some optionality and flexibility in terms of where you go, financially speaking. But it was such a hot sector. Our numbers were so good and we were getting enough interest that it felt like the right move at the time to raise as much money as we reasonably could. How important do you think it is that the VC brings value beyond the check? And the reason I ask the question is some founders are thinking, I just want the money and I want my VC out of the way. Other founders are thinking, I need to have some sort of strategic value beyond just the money. Like to your point, manufacturing expertise was a very big component of your founding team.

25:48I suspect there's got to be some value that the VC should bring. How do you think about it? There is. There definitely is. I think about it somewhere in between. And I think for a B2B enterprise company, it's probably more important because there's such a good like client lead gen engine that's built into VCs. They're really good for pattern recognition. They're really good for introductions. They're really good at like giving you the right vendors for certain things. They're really good at introducing you to the right advisor to help design your brand or whatever. You know, for consumer brands, I think it's less like transformative than enterprise brands, but it still has been helpful to us, definitely.

26:27How seriously did you think about the branding? So one of the fun facts I came across is that the name Ergata felt bougie to you and you liked it. is that true the branding yeah yeah it it is um the branding was really really important because we were going to have an expensive consumer product um and you know it's discretionary right you don't need this product to survive um and it's you know over a thousand bucks so you know brand was important but then from a product perspective we were going to differentiate with design. Our hardware and our software was going to be really design forward, aesthetically driven from a hardware and software perspective.