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The US$3tn question - “Are we in a recession?”

Emma Barry (Cofounder Good Soul Hunting) and Matthew Januszek (Cofounder Escape Your Limits Podcast) had the pleasure of interviewing Jon Canarick, Managing Partner at North Castle Partners - the leading small-cap consumer private equity firm based in NYC as part of the Connected Health and Fitness Summit in LA in February 2023. Jon has managed investments across a variety of healthy, active, and sustainable living sectors since 2001 and sits on the board of directors at the likes of Therabody, Echelon Fit, CR Fitness and Barry’s.

Or the following golden takeouts:

And the three trillion dollar question - “Are we in a recession?” asks Barry

“We are currently in a products recession, but not in a services recession,” says Jon. The former buyout specialist at Bear, Stearns & Co, Canarick knows how to read the markets and when it comes to fitness, wellness and tech, he sees a sector in which hardware is hurting, but services are strong.

“The reduction in the discretionary dollar, due to inflation, stock market issues and other wealth concerns, is playing out much more in the products universe than the service one,” he maintains. “The service universe is still on the upward recovery trajectory following the pandemic.”

Jon uses Peloton as an example of the at-home and digital fitness brands, which experienced hyper-growth during the pandemic – but have since struggled to build on the drive.

“Peloton and a number of other brands in the at-home sector had explosive growth during the pandemic, which has ultimately been detrimental to their shareholder value – because that hyper-growth was so volatile and difficult to manage,” he says.

“What you now see play out with nearly all of those businesses is a sharp reduction in the number of products they are selling – the hardware, the physical goods – but a reasonably strong stream of services-related revenues. Also, health clubs – whether traditional gyms or boutique studios – are doing well as service businesses, when compared to 2020 or even 2022.

He also outlines how the brands that experienced hyper-growth have provided a legacy in the way fitness is consumed.

“The thing people aren’t talking about a lot is that there are now millions and millions of workouts taking place at homes, which weren’t happening before the pandemic,” Canarick says. “And that’s thanks to the likes of Peloton and Echelon.

“So, the struggles that those businesses have experienced are on the hardware side of things – their services are still getting a lot of use.”

This, Canarick says, means that the connected and digital fitness sector – despite its struggles to re-adjust to a post-pandemic, post-growth world – remains resilient and one with a bright future.

He adds that it’s also one to look at – if you are in the business of investing.

“In the world of buy low, sell high, this is certainly a good time to be looking into that industry,” he says. He also outlined that the consumer’s relationship to value has evolved with more appropriate scrutiny and it’s a good thing that our choices are more intentional toward our flight to quality.

“You have to be able to see beyond the next 12 or 18 months. The number of pieces of hardware in the home that we, as consumers, acquired during the pandemic was an extraordinary amount. So they’ve pulled forward demand, but I truly believe that all of those businesses have very good long-term trajectories.”

Effects on funding

According to Canarick, seeing areas of industry in a recessionary cycle while others are thriving, is a new experience for many sectors. As a result, investments are being made with extra caution. Priorities when assessing viable opportunities seem to have changed.

This begs a million-dollar question for startups and brands which are merely entering the market: what qualities does a new business have that will make investors want to invest?

“One of the things that has changed, perhaps more on a macro level, is that, historically, venture capitalists got heavily involved in consumer categories which were traditionally technology-, media-, or healthcare-focused ,” Canarick says.

“In the last few years, where evaluations and losses were high, venture capitalists went into categories that they weren’t traditionally in, as part of their pursuit of buying customers for funding the media, technology and content investments.

“What we’re seeing now is venture capital backing out of those categories. There has been a massive swing back to having scrutiny over business models.”

Addressable markets and pathways to profit

Canarick says that, when it comes to funding startups, there are two main questions investors want answering.

  1. What is the business’ addressable market – does it have a large enough audience?

  2. Does it have a real pathway to profitability without burning tens of hundreds of millions of dollars,”

“This doesn’t mean that businesses aren’t allowed to burn capital in the early days. It also doesn’t mean they can’t burn a LOT of capital. But their addressable market needs to be large enough – and their path to profitability after heavy scrutiny holds up. So the scrutiny has really changed. A business model now needs to be a lot more believable.”

Canarick shares invaluable advice to fitness startups looking to bring in venture capital.

“I get pitched by people who are looking for funding for their new fitness equipment or concept all the time,” he reveals. “And nine out of 10 times, they’re proposing something that is very niche.”

“The thing is, it may be the greatest concept in the world for a very small number of people. But there needs to be realism regarding the addressable market, preferably achieved through market research.

“Equally important is the unit of economics and path to profitability. So, if I sell the product for US$100, will I make US$60 after marketing expenses and product costs – or do I only make US$10?

“So if you have a product or business you’re looking to raise money for, get clear on the potential of that addressable market – and find out how many others are going after that same market – and have a good pathway to profit which can be scrutinized.”



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