How the founder of ClassPass pivoted a struggling startup into a $470 million business, then made a tough decision to stop being CEO

ClassPass Payal Kadakia 2589

ClassPass, a fitness class booking company, can be found in 39 cities around the world. It has generated more than 30 million class reservations since Payal Kadakia founded the company in 2013. One year later, it raised a big round of financing at a $350 million post-money valuation.

But building ClassPass hasn’t been easy. The first version of the startup, Classtivity, flopped. Later, ClassPass significantly changed its pricing model, and users screamed. There have also been comparisons of ClassPass to Groupon, and skepticism that the company can keep both gym goers and gyms happy. Additionally, a slew of competitors have launched to compete with ClassPass on price. In June, ClassPass raised a new round of financing that was reportedly a “down round” — meaning the price of its shares were lower than in the previous round it raised. The company’s new valuation is about $470 million, post-money.

Kadakia recently stepped down from her role as CEO, a decision she explained in an interview with Business Insider Editor-in-Chief Alyson Shontell on our podcast, “Success! How I Did It.”

“The impact we have on people’s lives to me is more important than any title anyone can carry,” she said. “I want little girls to believe that they can be CEOs. The best thing I could do, though, is be an empowered female and authentically doing what I love. That’s the message I want to send, not go and do things you don’t like because that’s what the world needs, right?”

In the wide-ranging conversation, Kadakia and Shontell discussed:

  • Her passion for dancing and how it led to a ~$400 million startup
  • How she decided to pivot a struggling startup into one that would work.
  • How ClassPass finally got traction, and what it was like to suddenly be a startup every investor wanted a piece of
  • How to run a startup when you have two different, conflicting customers you need to keep happy (gym goers and gyms)
  • Her decision to step down as CEO, and how she spends her days now.

You can listen to the full interview here:

Subscribe to “Success! How I Did It” on Acast or iTunes. Check out previous episodes with:

If you’d rather read the interview, here’s a transcript, which has been lightly edited for clarity and length:

Alyson Shontell: We have Payal Kadakia here with us today. She created ClassPass. It’s a company where you book local fitness classes for a set amount per month like a $100 a month or something. There was some tough years in the beginning but then it started to soar and you recently made the tough decision to step away from the CEO role; you’re still involved very much so in an executive chairman position. We want to talk about all that.

First, let’s go back. You’re a world class dancer right? You’ve been dancing since you were little. That’s part of what inspired you to do this company.

Payal Kadakia: I started dancing when I was three years old in my basement with my mom’s best friend and it was my way of getting to know my culture but it also became more than that for me. It became this place where I felt like I could be anyone. I felt really centered and I loved it. Dance became this thing I fought to keep in my life throughout my career, through my college years, because I just felt so alive and so confident when I did it and so I never wanted to lose it.

Shontell: You have both sides of your brain going. You also went to MIT.

Kadakia: My parents immigrated here in the ’70s. Education, a good career were obviously north stars for them. At the same time I wanted the discipline, I wanted to make sure I entered the real world in the right way. I loved math and science so that was the other side of me and my creative side was really in dance and choreography.

Passion for dance

payal kadakia

Shontell: What kind of dance?

Kadakia: It’s Indian folk and classical dance. When I was in school – especially at MIT, I even wanted to dance there – so I went and started a dance company, a dance troupe that’s still on campus today. For me, when I felt like it didn’t exist, I created it. And that’s sort of very much the way I live and think about most things: when it’s not there, I know if I’m passionate enough, I’ll go and create it myself. When I left MIT and I came here to New York, I had my job at Bain and the first thing I did when I got here was look for where I was going to go take Bollywood dance classes. During my Bain days, I would invite my entire company to my shows. It’s just one of those things that I think made me Payal and everyone associated me with it.

When I was, I would say, entering my third year of Bain, most people at that point decide what they are going to do after and either they stay at Bain or they go to business school – it’s usually the trajectory. I wanted to find a way to dance more and to build something that was something more relevant and in the Indian dance space. I took a great job at Warner Music Group. I got to see the entire music industry transform and got to meet amazing people like Daniel Eck at Spotify. I was sort of doing that on the day job and every night for four hours, I would dance with a group of girls that also were professionals and amazing at their jobs. We would travel on the weekends and go and perform.

I always remember we ended up on the cover of the art section of The New York Times. This was two years into my Warner experience, maybe six months into when I started the company. I didn’t even have a website and I remember my boss was like, “are you going to come into work tomorrow? I don’t know, I think I saw you on the cover of the art section of The New York Times.” I love moments like that. It makes you realize that you could do so much and accomplish so much if you’re focused and passionate about what you do.

Turning a hobby into a career

Payal Kadakia Dreamforce ClassPass

Shontell: When we first met, you had joined something called Tech Stars. Your startup was called Classtivity at the time. It was a variation of what ClassPass is now. Was that the first company you had – I guess you started the dance company but that was your first experience with tech.

Kadakia: Yeah, outside of building some small models and algorithmic programs at MIT, I really hadn’t built something of that scale and the reason I did it was, I was one day sitting at my desk. I was looking for a ballet class to take and I was online and hours had passed by and I didn’t choose what I would do and at that moment, I was like why is this so difficult? Why is there not a website like Open Table or Seamless Web or ZocDoc that was just aggregating all this information and that made sense. I think it made sense to a lot of people because I raised a million dollars on that concept. So then when we launched it and no one went to class, that was really hard for me because that was my mission. My mission wasn’t to build just a tech website that looked nice and had all the information. It was to get people to go to class and pursue their passion and fall back in love with a hobby like I had with dance. I realized we weren’t creating that impact and so when I came to terms with that, I decided that we should pivot.

Shontell: So before we get to the pivot, though, let’s talk about: you leave Warner, you join Tech Stars. How do you get into Tech Stars? Tech Stars is this accelerator program where start ups would apply and it was really rigorous. It was hard to get into. David Tisch, who was a big venture capitalist in the New York area was running it. How did you wind up there doing this?

Kadakia: I had this idea brewing in my head and the vice chairman of Warner Music Group, Michael Fleisher, called me. He was like, why don’t you come to my office and I’d love to hear about this. I’d maybe met him three times in my three years there. Ended up spending two hours explaining to him what I wanted to build. And he was like, “You know what? I love this.” He became my investor and he also was one of the mentors in the Tech Stars program. He emailed David Tisch that day and to me, it was about relationships. I know I did the application and all of it. I really truly believe, though, I got in because people referred me. And I always tell entrepreneurs this: yes, it’s about your application, they’re going to get thousands, but find a way to really get a good reference, right? Or get someone to support you into the program. I know I had a lot of people who were vouching for me being like, “I believe in Payal. I believe in this idea,” and I really believe it’s because of that.

Shontell: This company that you’re building in Tech Stars – Classtivity – it’s an Open Table for classes. You could go on and you could see, okay, I want to take a pilates class, here are the places and the times.

Kadakia: It was be active and be creative. It had fitness stuff on there, it also had creative stuff on there like cooking classes and photography. Basically you could go on, you could search by genre, then you could pick the time and then you could pick the location and then we would show you all the schedule. Even though this was a different product, it actually helped us during that time, build all the integrations into getting all the schedule data. It wasn’t easy to do that, I mean, there’s so many classes happening all day long and we were trying to pull in the feed of information to say here’s all the up to date information on what’s available at every given time. Even though it was a phase the company where the product didn’t work, it actually did help us build a lot of the scheduling integration that we need to on the back end.

Raising money for a startup

Payal Kadakia ClassPass

Shontell: So Tech Stars has this demo day. You’re presenting to a room full of investors and journalists and things. I was in the audience listening to you present.

Kadakia: It was so long ago.

Shontell: What happened after that? Does the money come easily? Was it a bit of a slog? I know you had two different co-founders I think at the time.

Kadakia: When you have hype of something like Tech Stars, it definitely gives you some clout but at the end of the day, we didn’t have the numbers at the time. It was a moment for me to go back to my mission and I decided we would let go of certain people. We would focus the company on pivoting and iterating, which was a hard decision to do but what was the point of keeping a product up and funding that when it’s not working?

Shontell: Because people weren’t booking classes or there were no users or what was the problem?

Kadakia: They were coming and looking at the schedule data but they weren’t actually purchasing the classes, so they weren’t actually going to class and we kept changing the buttons. I think the day I knew, we sent out an email saying go to class for free and still no one went. I think the most transformative companies are ones that actually change human behavior and so while I had made it easy to go in search, I hadn’t motivated anyone to go to class.

Shontell: Ok so you decide you need to make this change but you raised a little bit of money after Tech Stars and then I think, according to CrunchBase at least, two years later, you raised your next round.

Kadakia: During that first year and a half, we raised roughly around a million plus after Tech Stars.  I mean we were good about our burn, right, so I had enough cash in the bank. That was one of my important points to even my team like wait, why are we switching? It’s like, we have money right now. The worst thing you could do is wait for it to run out with the wrong product. We actually had enough stamina and enough funding to go through the next year but it was more of: are we going to make the hard decisions to get and build the product that was going to actually going to get us to the next round of funding?

Why joining a startup accelerator was huge help, and the secret to getting accepted into one

Classpass Payal Kadakia 2782

Shontell: You guys start building this other product and you run a promotion, right? And something changes.

Kadakia: What we ended up doing is, okay, let’s go talk to these studio owners and figure out what they wanted and what we realized is a lot of them were offering a first class for free. So what we did was we packaged up the first classes for free and built a product called the Passport, which was a one month offering where people could go and try all these first classes for free as a new customer. The bet we were making is, okay, people are going to do this and then go back and buy a package at these studios. So we were collecting ratings and reviews on every single rating and class that you went to. My internal bench mark was 70 percent of people who gave something a positive rating would go back, and we weren’t seeing that. We were seeing like 10-15 percent of people go back, which to me was, while it was great revenue for us and people were finally going to class and it was beautiful profit, it wasn’t a good business model. I didn’t want to build a one month experience for my customers. I wanted to build a lifestyle where you stayed active and passionate and for the business owners, I was actually not sending them any money so when I fast forwarded that, in terms of the business, in terms of the product, we had to make another hard decision of saying this is wrong. When we actually looked at the data, we saw that so many customers were actually buying the membership over and over again with different email addresses which gave us some sort of sense of maybe this is a monthly subscription. We also did a survey and 95 percent of them said they wanted to do this experience over and over again.

Shontell: That was visiting different studios around you.

Kadakia: The variety was a part of the magic. We almost stumbled upon that. How important that was and it wasn’t just a one month discovery thing, it was a part of people’s way of life. You know, we had a meeting and we were like okay, there’s something here and we decided to iterate and build this subscription model as well. We still have this search engine up. We had this search engine up, the Passport and the ClassPass model up at this time. And you know, the team, we all were sitting there and we were kind of like, okay, what do we do? We started getting such positive feedback on this subscription. People were now emailing me with things that were about their life changing because of this product and they felt confident. It wasn’t even about, like, I went and worked out, you know? It was something bigger. I think as a entrepreneur and a founder who had been doing this for three and a half years and I did it because of my passion for dance, I felt like I had given them dance, what dance was to me. In that moment, I just knew we kind of had hit that magic and that lightning that was going to be revolutionary for that industry.

Shontell: You all took this product out to studios without it even really formed. You said we’re going to start doing this, this thing, it’s going to be $49 a month? For unlimited classes?

Kadakia: $49 was 10 classes.

Shontell: For 10 classes and you could do barre classes, you could do pilates classes. Before, I think maybe the assumption was you’re going to join a gym or you’re going to be into yoga or you’re going to be into barre.

Kadakia: Commitment to one studio.

Shontell: Right but not combining like cherry picking what you wanted to do based on how you felt and how you wanted to work out that day.

Kadakia: And, to be honest, technologically it was hard to do it because how are you going to look at all the information? And then also it just wasn’t a concept anyone had really done. If you wanted to be a dabbler, you would probably have a gym membership because it was too expensive to do that, actually doing it for the studios.

Pivoting to ClassPass

classpass

Shontell: Talk about how you get the pivot off and running, how you talked to investors about it, how do you talk to your team about it, how do you plant the flag and say, okay guys, Classtivity was cool but now we’re going to be ClassPass and we’re going to do this whole new thing.

Kadakia: We had actually put ClassPass up before we changed our name. Basically what happened is, we decided that we would try this other iteration, which would be the membership, which we launched in June of 2013. Three months in, we started seeing this exponential growth of ClassPass. It was completely viral. We went from 35 users to like, 300, you know what I mean? In a matter of three months. That’s exponential growth.

Shontell: You mean 35,000?

Kadakia: No, I’m talking about, like, hundreds. I’m talking about, like, really small numbers.

Shontell: Oh wow, so actually 35.

Kadakia: 35 people in our first month. I always say that to people because people want these bigger numbers but we’re building a subscription and a lifestyle and you need to figure out what your numbers are going to be. For us, when we got to a thousand members, we were at a million dollar run rate. So to me, that was what I was trying to get to, right? When you have $100 subscription, that’s what you’re aiming for. What was so great is we saw the growth of ClassPass surpass the Passport and Classtivity as a search engine, and so what we ended up doing is in February of the following year, changing our name to ClassPass, rebranding, we shut down the search engine, we took out the Passport. And I actually remember one of my advisors, Andrew Weinrich, he always would say to me, “just get rid of the Passport” – he could see this. We  kind of were like, “well it’s what gave us the variety and maybe people want the Passport and then we’ll do ClassPass” and he was like, “it’s like crack to you guys. It’ll be a chapter in your book.” I didn’t fully understand at that moment what that meant and now I totally understand what he meant. Sometimes you just have to be able to know that it’s the wrong product and move on.

Shontell: What was the initial thing you offered to users as this new company?

Kadakia: With ClassPass, it was $99 for 10 classes. We had about 50 studios in New Yor
Source: http://www.thisisinsider.com/classpass-founder-payal-kadakia-fitness-startup-podcast-interview-2017-6

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