532: How Eight Sleep Grew From $0 to $500M Enhancing YOUR Sleep - Matteo Franceschetti [VIDEO]

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0:39Just head to omnisend.com forward slash founder without the E to get started. All right, now let's jump back into the show. Around 10 years ago, I started looking at my health, trying to take care of myself. And I started wondering why Elon Musk is taking me to Mars, but I still spend the third of my life on a piece of dumb foam. Matteo Franchetti isn't just making mattresses. He is redefining the role of sleep in our daily lives. Enter 8Sleep, company that's taking sleep from a basic necessity to a key factor in optimizing your well-being. 8Sleep has gone global, securing a valuation of over$500 million and establishing itself as a business leader in sleep technology.

1:22Our goal is to improve your sleep and save your life. And so we really have followed the approach of a Red Bull or Nike. sleep before sleep. Usually sleep has always been about the lazy sun days in bed, but it's all about giving you the energy, the stamina, and the drive to achieve your wildest dreams.

1:41Hear the stories, learn the proven methods, and accelerate your growth and future through entrepreneurship. Welcome to the Founder Podcast with Nathan Chan.

1:55Well, welcome, Mateo. Super excited to speak with you. As I said offline, your product, Eight Sleep, it has been an absolute game changer for mine and my girlfriend's sleep. I cannot recommend it enough. I speak to so many friends about it. It is the coolest thing ever. So first of all, congratulations on building such an incredible product. the first question that I want to ask you is what inspired you to start 8sleep and how did your personal experiences shape what the vision of this company is? Yeah first of all thank you for having me I'm really excited to be here. I used to be an athlete when I was a teenager so I have always been in performance and recovery and I always understood the importance of sleep.

2:44And so around 10 years ago, I started looking at my health again, trying to take care of myself, thinking about longevity and wellness. And I started wondering why Elon Musk is taking me to Mars, but I still spend a third of my life on a piece of dumb foam. Why is there no technology in a third of my life, right? Let's say I live 100 years, Hopefully I'm lucky. That is 33 years of my life. And we live with iPhones and technology everywhere, but not in those 33 years. Yeah, crazy. So I agree. Like it's a crazy thought, right? Like sleep is absolutely everything. And more than ever now, there's this massive trend around longevity, around kind of, you know, optimized wellness and looking after yourself and being super healthy through using technical devices, right?

3:43Using technology. Like we've got The Whoop, you know, we're interviewing the founder of The Whoop soon, Will Ahmed. Now we're speaking to yourself. There's so many crazy devices and basically products out there that can help you optimize all areas of your life. So before, like is 8Sleep your first business? It's my third business. I had two companies before. One was in Europe, one was in the US. And they were in the clean tech space. so in solar solar energy got you and what happened there just briefly like did you exit them were they successful did they fail like yeah they exited so i had an exit with both of them uh they didn't reach the level of eight sleep today so hopefully it's live will be the biggest success um but um yeah both both of them they were quite a good story yep okay and uh just like for the audience, can you give kind of any numbers around how far Eight Sleep's gotten as a business, revenue, customers, users?

4:48Yeah, we didn't share the details, but we're in the hundreds of millions in revenue. And we got there, the current product is the pod, which is this master score that you can install onto any bed to improve your sleep. We launched the pod just four years ago, around four years ago in 2019, four years and a half. And it went from zero to hundreds of millions of revenue in a matter of four years and a half, which is pretty unique for an hardware product like that. We have hundreds of thousands of customers. We sell in the US, Canada, UK, Europe, Australia. We are opening Mexico and also UAE, so the Middle East.

5:31And so we start having a global scale and a global presence. And yeah, we have raised$160 million, 160 from some of the best investors in Silicon Valley. So we are very well funded, but we also have incredible unit economics. And so we have been free cash flow positive for the past 12 months. Yeah. Wow. Impressive. So talk to me, like you asked yourself the question, Elon Musk has taken people to Mars. Like, you know, we spend one third of our life sleeping. why is there no revolutionary product to optimize our sleep um tell us like how did that journey go to creating this crazy pod cover with water and cooling inside of it and an app like how did that start talk us through like i'd love to go back to like the early days yeah so the early days i mean let's take a step back so i can give you a bit more about the story but so the the two key co-founders with me one is max who's our cto and then there is my wife and she runs brand and marketing and so my wife and i we always used to have sort of hackathons at home the two of us building stuff during the weekend and we started involving max because he's the the real genius the real technical genius and so we have been playing with a couple of different projects until when i started having the idea about sleep i pitched it to max we created the first uh a pajama party.

7:01So we built a prototype and we invited some friends to his house in San Francisco. Alexandra created a beautiful presentation. And before the end of the night, one of our friends came to me and say, I love the thing. Can I give you 25K? And can I be the first check into the company? But there was no company, right? At the time, I still had my second company, which I was selling. And so I was playing around with different projects to see what would come next. and that is how the company started. So we incorporated, we took the 25K check and then we started with a crowdfunding campaign which at the time there was still a lot of hype around Indiegogo and similar platforms for hardware.

7:45Now I don't think it's the same anymore. The launch was extremely successful so we sold 8 ,000 units in pre-orders. After that we got into Y Combinator and there's a reason other funny story because we got rejected twice from YC and so the third time a partner reaches out is he's a partner focused on hardware so we meet he's really impressed by us and he says you should apply and I say look I don't want to apply again I already got rejected twice why should I do it again and the partner says no apply and let's see what what what can happen now that you have all distraction and you have evidence, right?

8:25And so we decided to time-bound it. And instead of taking days for the application, we just literally do a matter of an hour. And then we got into Y Combinator. And I think TechCrunch, at the end of the program of December 15, described us as one of the hottest companies in the batch. Interesting. That's awesome. So there's a lot to unpack there. I'm curious, why did you keep applying if they kept rejecting you? And what were their reasons rejecting you? Well, I think the first two times we were very early. It was pre-orders, hardware company, in sleep. So at the time, sleep was not such a hot topic as it is today.

9:09Consumer hardware is very difficult. If you have no evidence of traction in consumer demand, it's even more difficult. And so sometimes the YC partners, they really say, I pick the hardest and most complicated type of business I could ever pick. And so they really want us to be successful so we could become one of the most successful YC companies in hardware and consumer. Can you talk us through, Matteo, what did the product iteration look like going from pod four to now? What did pod one look like? What did the first pod look like? Yeah. So the first product of the company was not even a pod.

9:44It was the cover, but it was just tracking your sleep. And since when I started doing customer discovery, the thing we realized was that people were saying, look, this is nice and I might be interested, but what I really want is cooling. And the reason is 60, 70 percent of the couples, they fight their own temperature because different people have different preferences. Other users have menopause or they have hot flashes. Other people just sleep hot. And so everyone who was kept asking, literally 80, 90 % of the people I was talking to, they were asking for Kool-Aid. And so things really changed in 2017 when Keith Reboys and Kusla Ventures decided to invest in us and give us the money to build the pod.

10:28And the pod was the game changer. And as I said, in a matter of four years and a half, it went from zero to hundreds of millions in revenue. so it was only when you launched the pod that you found true product market fit yeah before it was good but it was not insanely great now i would say it's insanely great the product sells itself without uh pushing too hard and i think that in like that encompasses what it means to when you want to start a business having like getting the product right because if you get the product right it will sell itself correct and i think the other lesson i learned is particularly in hardware there is a rule of thumb that usually takes three generations for a product to become really good in hardware okay and so you should assume the generation one and generation two are okay but they are not great and so you need to have such a product market sitting hardware where people want your product so badly that even if generation one or generation two is not optimal they are still buying it because you need to make the money to get to generation three and that is what happened to us right it was the first product even if it was not perfect in every single detail in terms maybe of comfort of noise and other other tiny details people still wanted it so badly that they were paying for it and they were paying at a price that would allow us to have decent unique economics.

12:00And so that is how we scale. And now we are finally at pod four, which is an insanely good product that perfectly does everything we always wanted to do. Are you hesitating to take the next step in your e-commerce journey? FounderPlus has you covered. With proven frameworks tailored to your business needs for fast results, a supportive community of over 30 ,000 like-minded entrepreneurs and weekly live mentorship sessions, FounderPlus is your key to success. Try Founder Plus today for just$1 for seven days and start building your dream business with confidence. You can visit founder.com forward slash start dollar trial or click the link in the description to claim your trial.

12:38So now like pod four, like it's so good. Like I have a pod four. Vibration, alarm, anti-snoring detection that will slightly elevate you. cooling you know cooling before you get into bed autopilot that adjusts your temperature like you said the product truly sells itself anyone listening to this right now will be like wow i gotta get one of these yeah it's really really good it's the real perfect mass consumer product that we envision since day one but as a startup it takes time to get there really so so So it was from speaking to customers that you found the evolution of what got you to product market fit.

13:23How many customers did you speak to? Hundreds and then thousands because once we started selling the first product, which was not at all, we still sold 8 ,000 units in pre-order. So the company was already doing well, but it was not doing this well. So hundreds, if not thousands of customers, you were speaking to customers? Yeah. There was an email I was sending to literally every customer. It was automatic and it would come from my email. And so if they were replying, it would just go in my inbox and it said, look, this is Mateo. I'm the CEO of Eight Sleep. Hola, I would like to chat with you and get any product feedback.

14:01And then on top of that, I was doing customer calls. That is how I got to thousands of feedback. And when it came to like, how many calls did you have to do to know like what to do next? Like, because I think a lot of people that have this fear to speak to customers, right? And they like to assume that they know what a customer wants and they fall in love with the product, not the problem. So what advice or what would your kind of lessons be there? Yeah, I would say the thing of cooling was overwhelming. You can't miss it. And even today when we look at other features, usually you look at patterns and maybe you look at something that 20 % of your customers might look at or care about.

14:57But this thing of temperature control and the cooling was something that literally 80 % of the people I was talking to were asking for that. And there was already also plenty of clinical evidence that by cooling and heating your body during the night that you would improve your sleep. We didn't reinvent the wheel. We were just the first company to really build the mass consumer product that is premium and well-designed and well-executed and distributed across the world. So there was like this massive need that people were not able to articulate but they had a very clear problem and a very clear need and i just saw that and sold it so tell me how so you found the problem but how did you actually create the product like talk me through that like and i'd love to know nitty gritty details because you're creating a product that didn't exist you can't go to alibaba and private label you can't like you're breaking mold but you're using technology as well like like how much did it cost to build this product yeah i mean it took us millions to get there obviously we already had the team in china that we we we hired for the first product uh the original product before the pod which actually there there is a funny story because um we didn't have a team in china we had to manufacture we just finished y combinator and we have to build a thousand units we sold in pre-orders right of the of this product one and so i go to my wife and i say look manufacturing is not happening in china i have to go to china and fix it and she says oh cool so when are you gonna go to china and i say tomorrow and you say okay and when are you gonna come back and say once i fix it as i came back three months later but since then the same team i hired back then is the same team that built the pod and is still with us today so going back to your question how did we make that we had a product team in the u.s i was very involved in every product detail on the technical side my co-founder max was very involved and then we had the engineers mechanical and electrical engineers and then we had our team in China.

17:14Yeah, wow. So to create even the first version of 8sleep before the pod, you had to raise money, right? And that was built by Kickstarter. How much you raised on Kickstarter? On Kickstarter, it was Indiegogo. So a couple of things. So on Indiegogo, I think we did somewhere between one and two million and a million and a half. But we also raised money from investors. Before YC, I think we raised around a million from family and friends. And after the Modea Y Combinator, we raised$6 million in one day. And so that was the money that took us through the manufacturing of the first product. And then Cosla Ventures led around, I think it was somewhere around$8-9 million.

18:01And that was the money that we used to build the pod. Got you. Yeah, okay. So we're talking tens of millions of dollars in product development. This is crazy. And the only, I guess from the sounds of it, the only thing that gave you the conviction was speaking to customers to raise that amount of money to know what you had to build because it was evidently obvious that people wanted the cooling. yes i would add there was a lot of naivete meaning if i would go back with all that i know today i i don't know how we made it happen and i don't know if i would start the journey back then but now i'm really happy i mean i would start the journey as an entrepreneur i was still want to do what we are doing right because our goal is to improve your sleep and save your life and so i I don't think there is a much bigger mission that you can accomplish in life.

18:58But the scale of the challenges you have to face in consumer hardware is insanely high. Like every other company that I know that started with us in hardware is dead. We are literally the only ones that I survive of all my friends starting at the same time. um i even if you think of indiegogo and and all these crowdfunding campaigns how many companies went under and the reason is they they didn't have the unit economics they were not able to manage inventory efficiently they were not able to raise money they didn't have a real business so so many companies that have tried to solve like the hardware hardware kind of software solution problem like you say are dead so so what is different between what you did versus them like like what what kept you going were there times where it looked like it wasn't going to work oh 100 i mean i still remember plenty of times where we were weeks i know how you say weeks from the street uh when you run out of money uh and so i have still vivid uh visually i still remember a bunch of those times when i had the conversation with my co-founders um i remember plenty of times where yeah we had almost a serious a locked and then the investor walked away for for good reasons meaning it just happened um we sometimes the other problem it happens in hardware is you might discover late that certain things they cost you way more than what you expected and so maybe the price doesn't work anymore or the margins is way lower than what you expect that is all your projections you know if you start moving hundreds of thousands of units and you start changing your margins by ten dollars you start losing millions without you making any change to anything in your business it just happens overnight the day you discover it and so having this ability and agility to make sure you stay lean and you are almost a cockroach in how you deploy your money while you survive and you get growth that is what you need a 10x in this kind of business compared to a software size yeah so if there was one story that you could tell where you guys like you said you were weeks like how many times did that happen were you a week from the street five five times well four or five somewhere around there wow what one out of those four or five was the most memorable any crazy stories you could share there yeah so at the time we were talking to a major mattress manufacturer to kind of embed our technology we never really wanted to license the technology but there was a lot of push from investors in the early days and so it was a concept like intel inside but with our technology right and so i I have been negotiating this deal forever.

21:57And we got a term sheet to lead the Series A based on that term sheet. And a few days before we signed the term sheet, I got a call from the person at this mattress manufacturer. And they just say, look, guys, we decided to pass. We don't want to work with you. We don't want to work with the startup. And I tried to convince them. I say, I can fly there to meet you, blah, blah, blah. The answer is no. They push back. And so I called the investor. and the investor says, look, Matteo, I told you, you know, we have, we had a deal where I was giving you the money and the term sheet on the assumption that this deal would happen.

22:30And so if now you tell me it's not going to happen, I'm going to walk away. Um, and they walk away. And at the point that I think we had like four weeks, three or four weeks of money in the bank, you're paying the team and everyone. And so I still remember my, my, my co-founder Max at the time it was smoking and so we go downstairs and he's smoking in front of the door at the office in new york our office was in tribeca and so i still remember very clearly him smoking his face and i was calculating the number of weeks we had left uh but then we are cockroaches and so we got it done we figured it out i found another investor we raised i think uh 10 million dollars so we did the A and that happened with I remember we were negotiating this investor was from China and so a lot of negotiation was in the middle of the night for me and he was a very very hard negotiator not that he was the standard guy who follows not the U.S.

23:32standard terms he was trying to play tough and this playing tough was happening somewhere between 1 a.m. and 5 a.m. So there was no way in the middle I could sleep because there was so much tension in negotiating these details. But we got it done. Yeah, wow. And do you think that if it wasn't for you guys flying really close to the sun, that you wouldn't have been able to get where you are today? Yeah, 100%. But I also think there is something in the founders so far, at least in my co-founders, that was able to take us where we are with the conditions we have to face, right? We have to stay very nimble.

24:19We have to stay very lean, even compared to other hardware companies. It's hard. Hardware is hard because there are a lot of hidden costs that you don't know until when you know. And then don't forget one important thing. When you look at some of the most valuable companies in the world, they are consumer hardware companies because you think of Apple and Tesla. And so the hard part is really the beginning, the first couple of years. Then at a certain point, the business becomes more stable, more predictable. You really understand the unique economics. And at that point, if you have prime market fit, you can build and sell a big company.

24:56But the first two, three years are the hardest. Team is also critical as well. I've heard you openly speak about your hiring process. Would you be able to share that, like what you look for when you hire? It took me a while and it became less and less, but more and more important. And I look for two things. I look for signs of greatness and what I call Mamba mentality from Kobe Bryant. So greatness to me means it doesn't matter in what, right? Personal or professional life. Before joining its leap, you must have been great at something. You don't become great in your life for the first time at 30 years old, joining eight sleep or 25 years old, you know.

25:44And so tell me something that you did where you were exceptional. And I don't care if it was chess. I don't know if it was about repairing your dishwasher, helping your grandma, or you were at Harvard winning math competitions. But I want a sign of greatness. And the second one is the Mamba mentality, which to me is are you going to work insanely hard? Are you very ambitious? Are you extremely motivated to join Aidsleep? How many people do you have to interview do you find to find people with those couple of characteristics around mumber mentality and also signs of greatness in something? Yeah, now there was a funnel for a key role which I think we really nailed which we call it the business operation manager.

26:36But then really from this role, you could go into product ops or different roles. We got 3 ,700 applications and we hired three people. Wow. So you hired this particular role quite often because it's a generalized role and then people can branch out where they're strong. Yeah, they are so good. And at that point, you just say, okay, there are all these needs in the company, what you want to do, but you just create one role. and so you create one big funnel and then at that point we create a specific and special applications that is not market practice but I didn't like what was market practice and so I wanted to take the bar to the next level.

27:14Yeah, wow. When did you start doing this? This one is recent. We started this new format four or five months ago because I was not happy with previous formats. Interesting. So you have a funnel that looks for a business operations manager. you whittle it down to 3 ,700 people, you whittle it down to three. Yeah, we have three. Do you have a big team now? No, we keep it super lean. I think that is an area where we are insanely great. Every time I talk to investors, my number one metric is the revenue per employee. And I think we are unbeatable. We are better than Apple at that. Okay. If people want to do the numbers, they can probably work back what you're at in terms of revenue.

27:59So how many employees do you have? Let's avoid the specific numbers so not everyone can make the math. Yeah, okay. All right. But let's assume that it's like under 50 or something like that. It's definitely under 100. Yeah, it's more than 50. Yeah, it's more than 50. It's in the hundreds. Yeah, okay. All right. But not many comparably to revenue. Yeah, no. Very, very little compared to the amount of revenue we make. Yeah. And why is that important to you? Like you said, that that's one of the number one things that... Well, because I think I can tell you, I can talk for hours to tell you how hard we work, how intense we are, how good is my team.

28:41But at the end of the day, there is only one metric. Can 100 people do the job of 300 in another company? And if the answer is yes, then I can measure it for you. Then there is no debate that my team is better than yours. It's as good as that. So when you hear those employees saying, not those employees, those CEOs saying, oh, I have 800 employees and maybe they make half a billion in revenue. Those metrics, they suck. And so they should be ashamed to tell you that they have 800 employees. They're wasting money. Right? If you want to do half a billion dollar in revenue, do it with 150 people, not 800.

29:20and I tell you that I can achieve the same with 80 % less people than you because my people are better than yours. And it's interesting. One of the number one questions people ask you when they first hear about your business or you're getting to know someone is they say, how many employees do you have? And why do they ask that? Yeah, it's a stupid question. I mean, it's normal, right? So I understand why they try to size your business. But what they completely miss is the person who has 800 employees to make half a billion might sound bigger than the one who has 150 making 500 million. Between the two, where would you invest your money?

30:00In the one who makes half a billion with 150 people or 800? I go with 150. Exactly. That makes sense. Okay. So when it comes to, I guess, when you are pitching investors, how has your pitch been refined? Because you said that you faced a lot of resistance and a lot of people didn't understand the potential of sleep technology. Now it's hot, but it was not five, six, seven, eight years ago. Well, I learned an incredible lesson there, which I didn't realize at the beginning. If you look at our cap table, we have some of the best investors in Silicon Valley. We have Valor Equity Partners, Antonio Grazias, best friend of Elon Musk, and I'm the first board member of Tesla.

30:50This guy joined when Tesla was worth$70 million, right? So one of the greatest. We have Vinod Kozlan, Keith Reboys from Kozla Ventures, which are some of the greatest. and then we have Trey Stevens, who is the founder of Unreal, which is a$14 billion company, and he's a partner at Fundersberg. And it's not a coincidence that some of our best investors, our investors, most of our investors are some of the best investors, and I tell you why. The reason is the best investors, they have a vision of what the world will become. And all our guys, they always thought that someone will own sleep and will disrupt that industry, which is worth half a trillion, with technology.

31:37I don't have to convince them that that is going to happen. I just have to convince them that I am the best CEO and my team is the best team to make that happen. While instead, usually tier B, tier 2 investors, they still don't really think about the future of the world. they just think of us like oh these guys are selling a mattress cover that hits and cools your bed but they don't understand that the whole point of this company is to own the half a trillion dollar industry that is called sleep and then the debate is this if we are the good people to do it or not but i never had to discuss with my investors the one that led our rounds the fact that that is going to happen in the world there will be a trillion dollar business that owns sleep everyone's sleep.

32:25Then if you say it's sleep or someone else, let's debate that.

32:31So they have a bigger vision of what will happen in the world. This is what makes you an insanely great investor. And then you just find the partner, the right company to accomplish that vision that you know they will have. But there would have been tier one investors that knocked you guys back. Yeah. Some they did. But still tier one investors led our rounds and we never had the tier two. Yep. Okay. Because then we also have general catalyst, Y Combinator, Patrick and John Collison, the founder of Cruise, the founder of Flexport, right? So the Rolodex of our investors is entirely great because these guys are missionaries.

33:13So over time though, like the pitch has changed to the grander vision, right? And the size of the TAM. But then also I think what you're saying and what I'm hearing is because investors, first and foremost, they go with the vision and the size of the opportunity. But they're looking as well at the unit economics and your unit economics have gotten really, really, really good from what you're telling me. Which is really hard, particularly in the early days. But now we got there. It was painful, but we got there. You've also done partnerships from a branding perspective with athletes, teams, Mercedes AMG, Petronas Formula One team.