John Foley clearly didn’t take (ahem) a brake after leaving Peloton.
The former co-founder and CEO of the connected fitness company — who stepped down as CEO in February and left the company altogether in September — is back with a new startup.
Ernesta, which aims to launch in spring 2023, will sell custom rugs through a direct-to-consumer strategy. It has already raised a $25 million Series A round from a slate of investors that also backed Peloton, including True Ventures and Lee Fixel, through his current firm Addition.
It’s not surprising to see Foley getting back into the startup game by any means — venture capital both embraces failure and loves a good comeback story. Plus, there are plenty of previous examples of this happening involving folks who left companies on much worse terms than Foley did. But this deal is particularly interesting — even when you look past the seeming randomness of it.
For one thing, comeback stories in venture don’t generally start in the same calendar year that the previous tale ended in. And Foley’s ability to quickly raise such a sizable round before the company’s launch actually tells us quite a bit about where the market is at right now.
It shows that VCs really will still cling to who they know even if a company is pre-launch, even if there is no evidence of product-market fit, and even if the founder has only focused on it full time for about a month.
Of course, to Foley’s credit, he didn’t leave Peloton because he committed fraud, broke the law or lied to investors, but rather due to making rash decisions in an unprecedented market that didn’t pan out but could likely be learned from.
But, still.
In a market where many companies that do have traction or are on the path to profitability are getting fully iced out by investors due to “market uncertainties,” this narrative is getting old. Especially when you look at the dismal numbers of funding going toward companies founded by women and people of color, who struggle to raise capital no matter how well their companies are doing.
It also shows us that VCs are still very open to the financial gymnastics that became commonplace over the last few years. A pre-launch company raising a $25 million Series A as its first institutional round is the kind of froth I truly thought we weren’t going to see after last year. (For context, the median early-stage deal size through Q3 of 2022 was $10 million, according to PitchBook data.)
Plus, it shows investors are still willing to take a risk on a company that has no evidence that it is solving an actual problem.
“The rug category is ripe for innovation and I look forward to supporting Ernesta to capitalize on this great market opportunity,” Fixel said in the round’s press release. But … is it really?
Maybe it is just me, but I’ve truly never found the process of buying a rug to be particularly difficult or taxing either in person or online. I also can’t imagine that a centralized place to buy rugs will increase sales. How often do people buy rugs anyway? The reason I don’t have more rugs isn’t the buying process — it’s the fact that I don’t have the space for said rugs and most last a pretty long time.
Also, I thought investors didn’t like DTC companies anymore. This round tells us — again — that maybe direct-to-consumer businesses aren’t dead after all. The category has seen so many ups and downs over the last few years that it really was unclear how investors were feeling about the strategy that comes with lofty customer acquisition costs.
Those who are building DTC companies may be tempted to breathe a sigh of relief after seeing this news, but I think these investors would still be hesitant to back a DTC company not run by someone they were likely going to back no matter what.
I’m happy to be wrong here, but I don’t think I will be. I’m struggling to understand this one. I can’t fathom the thought of online rugs being a massive overlooked opportunity. My attempts to find answers were fruitless — Addition declined to comment, and Foley and True Ventures could not be reached.
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