Headspace: Everyday Mindfulness and Meditation — A Startup Investment Thesis by Asa Carey

Introduction

Headspace is a digital health software company based out of Santa Monica, California. Their platform, available on iOS and Android as well as through their website, offers users mindfulness resources such as guided meditation, sleep assistance, and mindfulness education. The company was founded in 2010 by businessman-monk duo Rich Pierson and Andy Puddicombe with the goal of making meditation accessible to as many people as possible, and now employs 408 full-time employees (LinkedIn). Headspace utilizes a subscription-based business model, by which users pay recurring fees to access Headspace’s proprietary content and analytics to record their progress.

Headspace offers new users a 14-day free trial, after which users must purchase a subscription at $12.99/month or $69.99/year. Subscribers gain access to Headspace’s proprietary content including guided meditation videos and expert advice from co-founder Andy Puddicombe. The platform has amassed over 2 million paying users to-date.

The company has raised $216M in funding through a combination of equity and debt financing. Its most notable round (February 2020) included a $53M Series C led by Waverly Capital, Times Bridge, and Spectrum Equity, among others, alongside $40M in debt financing provided by Pacific Western Bank.

Leadership

Rich Pierson is the CEO of Headspace, having co-founded the company in 2010. Prior to Headspace, Rich served as Head of Business Development at creative ad agency Bartle Bogle Hegarty. Seeking ways to mitigate stress and anxiety brought on by his advertising career, he met co-founder Andy Puddicombe, who ran a meditation consultancy at the time. The two founded Headspace with a goal to leverage tech to make meditation more accessible to the common person. Rich graduated from Nottingham Trent University in 2002 with a degree in Media and Cultural Studies.

Andy Puddicombe co-founded Headspace in 2010 after meeting Rich, a client at his meditation consulting practice. Andy spent two years studying sports science at De Montfort University before dropping out to become a Buddhist monk. After spending over a decade traveling the world studying meditation, Andy was ordained at a Tibetan monastery in Northern India. Afterwards, Andy returned to the U.K., where he established his meditation practice, serving high-stress individuals such as politicians, athletes, and businessmen. Andy’s mission and motive for starting Headspace is to spread the benefits of meditation to as many people as possible. Andy has written multiple books on meditation and has led a TED Talk on mindfulness.

Sean Brecker serves as CFO of Headspace, having served as CEO from 2014–2017. Prior to Headspace, Sean led a successful career in trading, serving as Head of Commodities Origination at Citi, Head of Commodities Trading at Nomura, as well as other trading roles at Lehman Brothers and JP Morgan. Sean holds a B.A. in Mathematics/ Economics from Wesleyan University as well as an MBA from The Wharton School at UPenn.

Product

The Headspace platform is centered on providing meditation to the average working individual. In addition to its proprietary guided meditation video and audio resources, the app also provides users with “sleepcasts” — audio resources designed to improve sleep quality — as well as expert guidance from co-founder and Tibetan monk Andy Puddicombe. Headspace’s content is highly specialized for the average consumer, with “bite-sized” meditations available for those always on the go, which are able to be done during brief periods such as morning commutes or on breaks. The app is gamified, tracking users’ progress and offering different levels of meditation based on mastery. Meditations are divided into multiple areas; after completion of the Foundations stage, users focus on areas such as health, performance, and relationships. Headspace has recently begun to differentiate via its B2B service Headspace for Work, which provides mental health resources for companies’ workforces. So far, over 600 businesses have subscribed to the service.

Market

According to Zion Market Research, the global mHealth (mobile health) market is projected to grow at a CAGR of 32.5% from $11.5B in 2014 to $102.4B in 2022. More specifically, the U.S. meditation market is projected to grow from $959M in 2015 to $2.08B in 2022 at a CAGR of 11.4%. Much of the U.S. meditation market is already encompassed by mobile mindfulness apps (~$134M industry in 2019 with an estimated 8.5% CAGR from 2019–2029), and as tech-enabled health grows, so will the mobile market share of meditation. The upward trend in these market sizes is the result of key drivers in consumer self-care interests. As meditation becomes more mainstream in America, Headspace and Calm (Headspace’s main competitor) have been the first movers into the mobile meditation space. Despite over 1,000 smartphone apps available for this purpose, Headspace and Calm account for over 70% of the market and have established strong footholds in the industry that will be hard to topple by anyone in such an otherwise highly-fragmented market.

Competition

Calm

Calm is by far Headspace’s largest competitor, with the two combined owning over 70% of the market for meditation and mindfulness applications. Calm is a mobile meditation platform founded in 2012 and based in San Francisco, California. The company currently employs 274 full-time employees (LinkedIn). Calm takes a more holistic approach to mindfulness and self-care, as opposed to Headspace’s focus on meditation. The app provides a wide array of offerings to users, including guided meditation, Sleep Stories, relaxing music, and mindful body movement/stretching videos. They operate on a similar business model to Headspace, by which users pay a $60 yearly subscription to access the platform’s proprietary content.

Calm has become the first unicorn in the mobile mental health industry. The company achieved this status through its $88M Series B in February 2019 at a $1B valuation, and has raised $218M to-date. Calm has seen higher revenues and faster growth than Headspace, having raked in ~$30M in revenue in Q1 2019 (132% YoY growth) compared to Headspace’s ~$13.1M (28% YoY growth).

Calm has partnered with celebrities such as LeBron James and Matthew McConaughey (the latter of which is the voice of one of Calm’s Sleep Stories) to promote the product, and has pursued social media advertising (Instagram, Facebook, Youtube) to pull in new users.

Ten percent happier

Ten Percent Happier is a far third in the market for mobile meditation. The company was founded in 2013 and is based out of Boston, Massachusetts; they currently employ 37 people (LinkedIn). The platform is similar to Headspace and Calm, but differentiates in its “no b***s***” outlook, through which it targets skeptics of the benefits of meditation and avoids the cliche “soft and gooey” tone of its competitors’ videos (TechCrunch). The app offers a library of over 20 courses which focus on reducing stress and anxiety, improving sleep, and increasing happiness and productivity. Ten Percent Happier differentiates through employing best-of-breed meditation teachers and scientists to provide high-quality content to its subscribers.

Ten Percent Happier has raised a meager $5M in seed funding to-date (with no funding since June 2018), placing it well below its aforementioned competitors. It hasn’t disclosed any financial data, but in 2018 boasted over 50 million “mindful minutes” logged by its users.

Beyond these two players, the tech-enabled meditation industry is incredibly highly fragmented; over 1,000 apps on the iOS and Android app stores offer similar services while taking up less than 25% of the total market.
Headspace’s only true competitive concern comes from Calm — with Calm’s higher sales, growth, and wider product offering, Headspace has its work cut out for it in order to remain a top player in this emerging market.

Metrics

Headspace

  • 62M+ downloads
  • $13.1M Rev, Q1 2019
  • $168M PIC ($320M valuation, 2017)
  • 2M+ paid subscribers across 190 countries
  • 600+ B2B subscribers

Calm

  • 40M+ downloads
  • ~$30M Rev, Q1 2019
  • $143M PIC ($1B valuation, 2019)
  • 1M+ paid subscribers

Conclusion

Headspace is without a doubt a market leader in an attractive and fast-growing market. The company is led by a passionate and invested duo and has seen impressive growth over the past decade, and operates under a low-cost, highly-recurring SaaS business model. That said, there is cause for concern for Headspace; namely, the enormous obstacle that is Calm. Competing head-to-head with an even faster-growing and larger platform could stunt Headspace’s ability to capture an underpenetrated market. Headspace’s upside comes from its differentiation through Headspace for Work, its B2B service. Calm’s lack of such a service gives Headspace the opportunity to capture a highly-recurring customer base before other players move into the space, thus providing the overhead for Headspace to achieve market dominance in coming years.

Disclaimer: All information in this report has been aggregated through numerous, public news reports/articles or Headspace’s website itself. Any misrepresentation of the company is purely accidental. BV is more than willing to correct any mistakes.

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