How On Sneakers & Duolingo Grew To $7 Billion Companies | Founder Effect Marathon

How On Sneakers & Duolingo Grew To $7 Billion Companies | Founder Effect Marathon

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We have huge dreams. We have dreams. How to make more Olympians in track, on the road.

And to make these dreams come true. We need resources, we need financial, we need funds. And yeah, the IPO is like a big ATM machine, right? Where you can then go and get this money. Carnegie Mellon is an excellent university, but it is a stressful place. People aren't happy.

They're just- They kind of just- It's not good. It's not a happy place. One of the things that Severin and I decided early on when we were starting a company is like, look, whatever happens, you know, our company should be a happy place.

I like the idea, I like the feel, but I didn't like the look so much right there with pieces of garden hoses or the glue gun on a shoe. You're not going to make a business. If anyone could see the potential in a running shoe with garden hose attached to the soles. It's Olivier Bernard, the six time Iron Man and two time world champion triathlete, spent decades training at the highest levels of competition.

But after leaving the sport, a friend of a friend reached out with a bizarre contraption. When it comes to running shoes, the usual suspects like Nike, Brooks and ASICs are tried and true. But when Roger Federer decided to invest in 'On' the running world took notice. Sales were up 77% over 2020 and 'ON' is expecting to generate over $763 million in sales by the end of this year. The three numbers to look out

for in this story are 1000, the amount Olivier took home after winning his first professional race. 150,000, his annual salary at the height of his earnings and 746 million, the amount 'ON' raised and his IPO in just 11 years. The upstart shoe company went from $0 to a valuation over 7 billion.

Here's how a world champion triathlete landed Roger Federer on their way to creating one of the fastest growing shoe companies in the world for CNBC MakeIt. I'm Nate Skid. This is founder effect. Olivier grew up this close to the poverty line on his family farm, on the Swiss countryside far from the urban city centers and the cool shoe stores found inside of them. So you could call them in some ways entrepreneurs, but not so much in that kind of business driven. So not so much, no. I think I just got the athletes spirit or athletes gene in my blood running, and I think that got me really started.

In the early eighties, he became enthralled with endurance athletes competing in a new sport called triathlons that combined three of his favorite activities. But he wasn't the fastest sprinter, the most adept biker or the strongest swimmer. He was, on the other hand, exceptional at enduring their physical tolls. But turning his

passion for triathlons into a living was a long, hard road. Olivier was stuck in a cycle. I still remember that I had to collect some prize money every race I did in Europe in order to pay the next flight, Right. So if I didn't make any prize money, I had to skip a race. His first real payout came at the age of 21, finishing first place in a marathon in Tucson, Arizona.

And I won 1500 U.S. dollars and the box of Powerballs. And it was like Christmas and Easter and everything in one day. I couldn't But after paying his brother back for the entrance fee, Olivia took home $1,000.

And so began a two decade career, culminating in two world championships and six Ironman titles. So how do you go from, you know, like an aspiring athlete to a three time world champion? You know, often I see the same thing. Pretty similar in business. Don't think too much about what's on top. I mean, just take step by step and, you know, enjoy the levels you reach.

At the height of his earnings as a professional triathlete, Olivier was bringing in about $150,000 a year. By the time he turned 35, he knew his career was entering its final stage in 2006 at the age of 37. And after having three kids, he entered his last professional race.

So when you're kind of wrapping up your career, you know, it sounds like some people have a hard time kind of letting go of that competition and the training. How did you make that transition? How did you make that move? I mean, it wasn't a clear cut. I mean, yes, ending the career was a clear cut, but, you know, training so many hours and as a long distance athlete, you spend a long time on a bike and also running, you know, out in over right sometimes into Tucson, along Dry Creek. And and I always was thinking, you know, about not only another running shoe, but another running field. How could I place another running sensation in a running shoe? After retiring, Olivier founded a coaching company and even had 100 athletes in his camp.

But he just couldn't shake the idea of coming up with a better running shoe. Oh, I don't believe so much in luck in life. I think it was just, you know, it was something that needed to happen. That friend of mine or then now a friend of mine, but an engineer. So he called me and said, Look, I have an idea. I want to put it on your shoe and your existing shoe. And that's pretty much that

ugly looking, you know, old Nike shoe Pegasus. And he put on something that looked like over actually pieces of a rubber hose, you know, And I said, I'm not going to run in these. Right? But then finally I ran in that sample and and it struck me it was something I'd never felt before. And there was so much of that sensation, I felt like, whoa, this is really helping the runners to to show what running is all about. Olivier says the difference was the way the rubber hose not only padded vertical.

Movement, but assisted horizontally as well. Now, Olivier might know a good running shoe when he sees one, but he isn't a numbers guy. So he brought in two partners who knew each other from their time at McKinsey. If anyone could

help Olivier turn his crazy shoe idea into a profitable business, it was Kasper Capeci and David Elliman. In 2010, the trio launched 'ON' out of an office in Zurich. So how did you bring the team together? What was that like? I realized soon I'm not going to be the businessman now. A one man show. That can actually pull this off. And I realized that I'm probably not the numbers guy. I love numbers, but they're better guys out there. I love design, but I've not studied design.

I love marketing, but I'm not a marketeer. So I reached out to Kasper, who used to be my agent at a certain point of my professional career as a triathlete. And he then brought David on board, who was his best friend in his career. Olivier wouldn't say how much, but each person invested the same amount in the startup. And I think that was really the fair point to start, right? In 2010, just three years after hanging up, his cleats 'ON' was born. But now they had real skin in the game and it was time to act fast.

Dave flew straight to China to begin working on a manufacturing process. We had to be super quick. I mean, we knew, you know, we can't lose much time and we won't lose. I mean, every half year, you know, we lose or every two months we lose. It's costing us only money. So we had to be very quick.

In six months, they took 'ON' from an idea to a prototype. Its first production order was for 10,000 sneakers. The company generated about $100,000 in revenue that first year. But those early shoes were

squeaky and not exactly esthetically pleasing. So they came up with another prototype, this one called The Cloud Racer. In 2013, the team headed to Munich for ISPO, the largest sports gear exhibition in Europe. Expectations were low, but on a whim they entered the Cloud Racer into a competition for the Gold Award. They beat out over 300 competitors at the exhibition. This was a big deal for such a small

company. And that was a neat push, a needed push at the very start. Because I remember Kasper and I driving to Munich from Zurich. It's a three hour drive with the car. We said, Let's make a promise, you know, we only going to sign three countries Switzerland, Germany and Austria, no others, because we, you know, we need to focus our energy. And we said in the car three days later, and of course, it was 19.

Countries that same day and received an order for 2000 pairs of cloud racer sneakers. The only problem, the shoes didn't exist. Do you know how you guys employed your cash? At the beginning, I think in shoe business or in many cyclical, cyclical companies like our business, it's it's the risk that you actually have to pay the product before it's even produced. Right. Even us being a startup, they wanted to

see the money before they even would start sewing or producing outsoles And then, you know, you pay maybe half of it and then the other half, as soon as it's on the boat and you only get the money once, not only once the product is actually sold to the end consumer, then you maybe have another like 69 days till you have any money on the bank account. The team was cash poor but received an infusion from four angel investors. Olivier would not disclose that amount.

So what does your expansion look like? Was there, you know, like you land these 19 countries, which is fine, but like, you still have to sell shoes. You know, you not only have to convince the consumer, but even more the retailer and the retailer, you know, he has a reputation or she has her reputation on the line, not only at the beginning, we would go to retailers and make a presentation like all other brands would do, right? And then we were just unhappy. And with the results, you know, they didn't buy in and they not at the end, they would not say, you know, give me the order format. I order 50 or 100 shoes. They often said, Oh, I think about it. And we all know what that means, right? Probably not or not now. We're not yet. Right.

And we said, why don't we go run with them? And then what happened? And we realized that really after one or two times we did it, they started asking questions. They said, Oh, I actually like the landing. Why is that landing so soft? And why is actually then what? Why is it so rigid in the forefoot and how come so propulsive at the very end when you push off? So it was much easier to answer the questions they had about our technology instead of trying to sell them our technology. And that really made them the turnaround. So I really love the idea of like, let's stop talking about what this thing can do. And let me just like show you it sounds so much better.

It's honest, right? It's the honest way of it's not me trying to sell thing right Something. It's it's really you tell me if you like it or you don't. And then if you like it, you probably want to know more. Right? 'ON's' brand of experiential marketing was effective. In 2013, the team was only ten members strong. Then in 2014, ON's running shoes were

worn by Nicola Spirig, who took home the silver medal in the triathlete during the Rio Olympics. I mean, it's mind blowing. It's not only that, you see, even only seeing people competing in these shoes is something else. Right? But then you see that athletes go for medals at the Olympics is something else truly that was truly super emotional. Then they noticed an Instagram post by Roger Federer, who was wearing a pair of 'ON' sneakers.

So like any good marketer, they sent him a gift package. It didn't take long before they were having dinner together and talking shoes. So like, how does Roger come into your life? Like, how does that even happen? You know, the funny thing and I know still talking about it, it might sound a bit arrogant, but it wasn't us finding Roger. He found us. I mean, come on. I mean, you know, We'll be there as a young Swiss riding shoe company to sponsor Roger? That's not going to happen. We wouldn't have the funds, so we wouldn't even think about that.

Right? So it was him reaching out to us and saying, maybe there's a way we can pop up. And never, you know, it was never in the room saying, could it be a sponsorship? He knew that we were too small and it's not our sport, but he want to become a partner. And what was your reaction? To be very honest, we were a little afraid at the beginning, you know, Is this even too big for our brain? You know, Is he his name is like, you know, I mean, everyone knows Roger.

Does it now become Roger Owens 'ON' a side of, you know, everything else he's doing? And Roger was always aware and he always wanted to be very careful that this is not the case. In 2019, Federer invested an undisclosed sum in 'ON' and is currently designing a customized shoe for grass, clay and hardcourts. He came into office maybe the second time he visited out into the lab, and he said, My aim is to build the best tennis shoe ever.

The pandemic has been good for the shoe company. In March of 2020, sales stopped in their tracks, but by the end of the year, they were tripled the sales volume from 2019 and the world took notice. 'ON'Went public on September 15, 2021, and raised $746 million with a valuation of 7.3 billion.

So why make the decision to go public? Like how did that come about? If you want to play in the big league and with us in Europe, you would call it the Champions League like in soccer, right? And you want to compare and fairly compare to Adidas, Nike, Brooks, you know, all these big guys when it comes in terms of financials, you know, you have to play the same rules. And I think that's one of the reasons we've grown up and we think that we want to be comparable to these companies because we want to keep growing. And another important thing is, is governance.

You know, we have a dual chair construction that we actually can secure our majority and so we can steer the company, the five of us. And that's super important, You know, as you grow and have your financial once, you might lose maturity and we gain that back to that dual share cost. And that's an important thing. And then lastly, and maybe that's even the most important thing, is we have huge dreams. We have dreams. How to make more Olympians in track on the road and to make these dreams come true. We need resources, we need financial, we need

funds. And yeah, the IPO is like a big ATM machine, right, where you can then go and get this money. So it's maybe a couple most important reasons why the IPO.

And now the company has over 1000 employees and sells shoes in more than 60 countries, with North America making up its biggest market with about 40% of its business. You know, I've only written down one note this entire interview, and I want to bring it back to like the very beginning of this interview. You said, don't look at the top. Look at what's right in front of you. Like, can you walk through that philosophy for me? I remember one of the first talks when I got to know David. You know, Kasper I knew from being

my agent for a long time. But David, that means, okay, let's do it, you know, and let's think about the business plan and who are you going to attack? I said, No, we're not going to attack. You are competing, but we're not going to attack. It's not a confronting sport.

You are at the same starting line. And we are small, we are slow, you know, and we don't hit any numbers for the big guys right now. We should just try to make the best product on the planet.

Carnegie Mellon is an excellent university, but it is a stressful place. People aren't happy. They're just the kind of just it's not good.

It's not a happy place. One of the things that Severin and I decided early on when we were starting a company is like, look, whatever happens, you know, our company should be a happy place. By the time Luis Von Ahn turned 24, he was already a millionaire several times over.

The 43 year old may not be a household name, but I'm willing to bet you're one of the hundreds of millions of people who use his technology every day. Luis isn't your average Unicorn Tech founder. He actually pays his drivers to give feedback on their interactions with potential executive level hires on their way to and from the airport to weed out toxic personalities. All right, Luis, thank you so much for taking some time out. I appreciate it. Yeah, of course.

There are three numbers to look out for in Luis's story 42,000, the amount he made each week digitizing copies of The New York Times, 183 million, the total amount of outside investment he raised and six and one half billion. The total valuation after Duolingo went public in June 2021. Here's how Luis Von Ahn built Duolingo, one of the most popular educational apps in the world, while managing to keep it free for almost everyone who uses it. For CNBC MakeIt.

I'm Nate Skid. This is Founder Effect. Luis grew up far from the Ivy Leagues in Guatemala. His mother was a doctor and made sure he learned English at a younger age. For many people, that can be the difference between a life of struggle and one of opportunity.

How big of a deal do you think it was to go to an English program in terms of setting on the path that you ended up that you ended up on? I think it was a huge deal. In Guatemala, for example, you probably double your income potential by just the fact that you know English, but you don't have to know anything else. There were two formative moments in Luis's young life. The first was witnessing the tension in his family's candy business between the owners and their workers.

Different people in my family would, you know, a lot of times just have this vision that it's kind of us versus them. The second was a visit from a recruiter from Duke University who was scouring Central America for undiscovered academic talent. And she essentially kind of she didn't quite fill out the application for me, but she almost filled out the application for me. And in 1996, Luis moved to the United States to attend Duke University with no money to his name, yet he still managed to graduate at the top of his class with the goal of becoming a math professor.

But that dream didn't last long. I realized that all the professors that were in math were doing research on problems that hadn't been solved for 500 years or whatever. Luis wanted to spend his time and energy tackling new challenges. In 2000, he was accepted to a computer science Ph.D. program at Carnegie Mellon.

But it didn't take long for him to develop a knack for creating profitable businesses. In 2003, he created a simple game pairing two players and showed them each the same image. If their descriptions matched, they moved on to the next one. What they were doing is basically just telling Google what's in these images. And so that that really kind of improved the image search, etc..

Luis says Google bought the game in 2003 for a couple of million dollars in 2006. Luis landed on his next big idea after listening to a talk by Yahoo's chief scientist. The problem was that spammers were writing code to steal millions of email addresses and flood those inboxes with junk mail. Lewis's answer was Called this thing called a CAPTCHA, which is these distorted characters that you have to type, you know, all over the Internet whenever you're buying tickets, Ticketmaster or whatever.

It just, you know, you get this image of messed up characters. So we came up with that. That was our idea. About 200 million people take 10 seconds out of their day to fill out a CAPTCHA. And while some would sit in amazement at their impact on humanity, Luis suffered from pains of guilt, which led to his next big idea. And so if you multiply 10 seconds by 200 million, I started thinking, okay, that's that turns out to be 500,000 hours every day.

I started thinking, okay, can we can we make good use of these 500,000 hours it gave to this rights to this kind of next project, which was called reCAPTCHA. So it's just like a redoing of CAPTCHA, where the idea was that as people were going to they were typing this, you know, over the Internet, not only would they be authenticating themselves as humans, but they would helping us to digitize books. Word of the new tech reached the New York Times, which was in the process of digitizing about 150 years worth of old newspapers. Luis charged the Times $42,000 for every year of content he digitized. We could digitize an entire year of content in about a week. So pretty quickly, we started

getting checks for 42,000 bucks, like, you know, about one a week. Luis founded reCAPTCHA in 2006 and sold it to Google in 2009 for an undisclosed sum. But he said it was in the tens of millions of dollars. In 2006, Luis was awarded the MacArthur Fellowship, also known as the Genius Grant that came with $500,000 and no strings attached. It's not like you apply for it or anything. Just one day you get a phone call and they just ask. Fortunately, I picked up the phone

because, you know, nowadays if I get a random phone call, I do not pick up the phone. So what did you do with the $500,000. Put in the bank account. Honestly, I probably spent it mostly on a little seed funding for this reCAPTCHA.

So where did the aha moment for. A language service come about. Where did this happen? Yeah, that was so. I was. That was around 2009, 2010. I had sold reCAPTCHA to Google. I had a PhD student named Severin Hacker, who is my co founder at Duolingo.

At the time we hadn't started anything. One of the insights was, you know, computers are getting much smarter and we could make it so that computers really could teach everybody as opposed to teachers having teach everybody. That was kind of the idea.

Now that they knew they wanted to teach, they just needed to agree on a subject. Eventually we settled on teaching languages, and the reason for that was because both of us have, you know, both of us learned English. So we thought, okay, let's do something to teach English. The other thing that we really

wanted to do was we really saw technology as a way to to be able to really democratize education. Beautiful thing with technology is that it doesn't cost you that much more to teach more people than just to teach one person. So we thought, okay, well, we teach everybody and we could teach them for free. And just like that, Duolingo was born.

Well, sort of. So how do you come up with the name Duolingo? We looked at a lot of names. One of the ones was Floont, which should sound kind of like fluent, but it more sounded like flu-ent. And then my friend said, Oh, that sounds like I 'floont-ed' all over the floor. Like, it's like, not good. So we had we had a bunch of names.

Eventually we came up with not Duolingo, but Monolingo and and that sounded like like an illness, like you have monolingo. And at some point it just Duolingo made a lot of sense. Now that they had a name and a mascot, it was time to turn their idea into a business. Instead of applying for a grant through Carnegie Mellon in 2012, Luis reached out to Union Square investors and secured $3 Million in seed funding.

They had just invested in, like Twitter and Tumblr. And they were like the biggest thing out there. And Foursquare was also the biggest thing out there. And so Union Square Ventures was like, Oh my God, like, amazing. Okay, so can you tell me the amount that Series A from Union Square was? Yeah. I mean, one thing that is important to

mention is serious. A back then this is the year 2012 were very different than today which today is massive. So in 2012, a very nice, serious day that you were happy with was $3 million. 3 million today. That's not even called a serious day.

Today is like seed funding. Around that time, Luis gave a TEDx talk. And at the end, he made mention of this really cool new application focusing on language that he was working on. Well, that talk went viral and soon Duolingo, which at the time was just a landing page with a place to put an email address, had a waiting list with over 300,000 names on it.

At the time, the other thing that was going on at the time was there wasn't really a good way to learn a language on the computer. I mean, the thing that there was was Rosetta Stone and it was like super expensive. It was like 1000 bucks. And so there was this thing that just said, You can learn a language here. It is entirely for free. And so a lot of people were like, Yeah, sure, I'll give you my my email. And so that worked out pretty well.

The instantaneous interest in Duolingo and has proven track record helped Luis raise even more capital 183 million in all. He used almost all of that early investment money to build out a team. And for the next three years, he focused solely on growing his user base. He didn't even think about monetization. Up until 2017 ish.

Duolingo was making no money. This was not. It was our finances were very simple. Simply, we spent money on mainly people's salaries and that was at that point though, we decided it's probably time to make Duolingo be a self-sustaining business.

And we started actually monetizing and it has worked out very well. By now, Lewis says, Duolingo had about 10 million active users and was the number one education app in the world. Now they just had to figure out how to make money while keeping the app free.

We didn't just want to say, you know, turn around and say, Oh, just kidding. Now you've got to pay. So what we ended up doing is we ended up coming up with a business model that ends up being pretty similar to, say, what Spotify does or what the dating apps do, which is you can use Duolingo as much as you want for free, but if you don't pay us, you have to see some ads at the end of a lesson. And then if you want to turn off the ads,

you can pay us to subscribe. And then we turn off the ads and we may give you other kind of premium features. So the combo of ads and subscription worked out really well. And so we ended up making a, you know, every year since then, we've made more and more money. A full 94% of Duolingo active monthly users opt for the free version, which includes some ads, but the company makes most of its revenue from the other 6% of its users who were paying subscribers. 6% of our users give us the majority of our money by now.

There are more people in the US learning languages on Duolingo than there are students learning languages in all US high schools combined. And one of the reasons for Duolingo success is that it feels like a game. In fact, the app keeps track of how many consecutive days a user logs in skip a day and it goes to zero. We have over by now, I mean, we haven't quite released the figure, but we have released this one, which is we have over a million daily active users who have a streak longer than 365. So we have more than they haven't missed a single day in the last year. What day did you IPO? What was it like for you personally? Were you nervous? Do you remember the moment? Extremely exciting. I mean, a big milestone for

the company and for everybody who has been working on this. I mean, Duolingo has really good employee retention, as in like people really rarely leave Duolingo, so most of the original team is still here. And so there's been all these people that have been at this for the last, I don't know, eight or nine years. So it was pretty transformative. What happened to the share price? Our share price was $102. It went it went really high.

I mean, the first trade was 140 some maybe 141 or something like that. So I don't know. The exact number is around 140 and then it just kept going up, etc.. And. You know, like that would be like plastered on my wall is like a big memory. You know, share price is I was told by a lot of CEOs of publicly traded companies not to pay too much attention to the share price.

And I've been doing that. And it's actually really good feedback is basically what your share price moves randomly with, like basically no connection to what's going on with the company. What was the biggest money mistake you've made along the way with Duolingo? I don't feel bad about anything we've done. By the time we went public, we still had 100 and some million dollars in the bank account, meaning we had only really spent 80 million. Of course, we hadn't been making some revenue the last few years, etc. but basically we could have raised a lot less money.

And by raising a lot less money, you know, I think us employees, me and the rest of the employees would have owned a larger fraction of the company. When I was talking to the management team about interviewing you, one of the other senior producers said that she had gotten very far in the in the interview process at Duolingo. You guys flew her out to Pittsburgh, you put her up, and she said that even though she didn't get the position, the culture and the vibe at Duolingo stayed with her and she was like, Nate, you have to ask about that culture. And so it dawned on me when you were telling me about this candy factory that you watched and then hearing about the culture that you created.

And I'm wondering if you can kind of show that up for me, like what you learned there and what you apply now. Most companies, there's a lot of employee churn, meaning like people leave the company, etc.. Very few people leave Duolingo.

It's because it's a good workplace. And I think that there's two reasons for that. I think the you know, what I what I saw with with my family and this is not it's not that my family is doing anything bad. And I think it just in in in a country like Guatemala, there really is a kind of a boss versus employee like us versus them kind of thing. And I saw that that really didn't work. I mean, it's much better when when everybody is much more egalitarian culture.

So Duolingo has a, you know, in as much as possible, a very egalitarian culture. That's one thing. The other thing is, you know, when when we were at Carnegie Mellon, Carnegie Mellon is an excellent university. I have nothing bad to say about it. It is really an excellent

university, excellent for artificial intelligence and for all kinds of things. But it is a stressful place. And people, when you enter the buildings there, you people aren't happy. They're just they're kind of just it's not good. It's not a happy place. And, you know, one of the things that Severin and I decided early on when we were starting a company is like, look, whatever happens, you know, our company should be a happy place.

Louis has a unique way of weeding out potentially toxic employees. I'll tell you some of the things we've done, by the way, even for executives. Whenever we fly an executive for an interview or not just executives, for a lot of people. Whenever we fly them, we have a driver come pick them up in the airport and we have a set of drivers that are the same everywhere.

Actually that's part of your interview and people don't know it. It is how you treat them. And so we get feedback from the drivers about how well they were treated. And so now normally that most people are just perfectly fine, like, just like but we have we have not made offers to very, very qualified, competent people because they were nasty to our driver. And we don't like that because that just means you're going to you know, you're going to be nasty to the little people and we don't want that. And so so yeah, I think that that type of stuff has really helped. Luis's businesses have been incredibly successful, and yet they all seem to serve a greater purpose.

The picture matching game had the added benefit of generating SEO terms. CAPTCHA helped Yahoo! And many, many other digital businesses decipher between humans and robots, and reCAPTCHA is helping to digitize the world's books. These ideas have made Luis incredibly wealthy, but he's most proud of the culture he created at Duolingo. A lot of the people that come work at Duolingo do so because they love this mission of developing the best education in the world and making it universally available.

2022-12-23 06:37

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