For Steele founder, Snap’s purchase is another shot in arm
There’s nothing like an infusion of cash to make an entrepreneur smile, and Steele Smiley is beaming these days. His company is the latest purchase by Snap Fitness founder Peter Taunton—and it won’t be the last.
Dressed in a sharp dark suit with a crisp white pocket square, Steele Smiley—yes, that’s his given name, after his grandfather—leaps onto the high counter at Steele 365 and strikes a pose for the photographer.
“I don’t watch anyone. I think they watch me,” says Steele Smiley, who heads Steele 365.
The 35-year-old Minneapolis entrepreneur has a massive new dose of confidence courtesy of Peter Taunton, the founder of Snap Fitness, who just purchased with cash five of Smiley’s high-end clubs called Steele Fitness.
Steele 365 is the prototype Snap will roll out regionally first and then nationwide, as soon as it’s perfected. Taunton has built more than 2,400 Snap Fitness clubs in the past 10 years around the world, and is still doing so at a clip of 140 to 180 new stores a year.
Smiley wasn’t always so high. He made loads of money in his early 20s, when he came to Minneapolis to start a tech company. “I was employee 15 or 16. We raised $80 million, the last of the dot-com boom,” but he hated the work. “It was everything I didn’t want a company to be,” he says.
He raised $200,000 from investors to start an early version of Steele Fitness, but it flopped and he decided to return all the money because “it was the right thing to do.” A lifestyle downgrade followed. “I went from a four-story home in Eden Prairie to a 1,000-square-foot rental with dirty carpet in St. Louis Park,” Smiley recalls, naming, respectively, a tony Minneapolis suburb and a workaday one.
“I had early success. I got comfortable. I lost it all,” Smiley says, yet he’s OK with the lesson. “That’s good for a young entrepreneur, to learn in fact everything is going to be tough.”
Franchisor as investor
Smiley is now part of an interesting experiment, in which Taunton, a franchisor, is acting like a private equity firm and buying up brands he finds intriguing in the fitness space.
The twist is two-fold: Taunton is an entrepreneur himself, so he understands the psyche of the founders he approaches. “Being a founder myself I would like to think I understand the sensitivity of someone selling their baby, something they created, and I’m respectful of that and appreciative of that,” Taunton says.
And Taunton uses his own money, paying cash for his acquisitions generated through Snap. “There are not a lot of private equity firms that have a true understanding of the granular intricacies of franchising and vertical integration. If we come and buy a concept with 30 locations and we can blow it up to 1,000, the founders have a huge payday in the end of that rainbow.”
Taunton snapped up Steele Fitness late last year, attracted by Smiley’s ability to create a distinctive brand in the Minneapolis-St. Paul market in just a decade. “He’s single-handedly launched a brand that is perceived in the metro area as the Ritz Carlton of the fitness experience,” Taunton says. “I love that. I love how the stores perform.” And after a conversation in the summer with Smiley, Taunton paid cash for the brand and brought its founder on board.
High design is part of Steele 365, because “the world loves beauty,” Steele Smiley says.
That operating mode is becoming standard for Taunton, although to varying degrees of success. In 2012 he bought Kosama from its founder, a group boot camp concept that has yet to take off, with just a handful of clubs opened so far.
In January 2013 he bought an interest in 9Round, a 30-minute boxing concept with 30 locations at the time, and this one’s a knockout. “Here we are 10 months later, and I’ve just opened my 78th store and we should have close to 100 by the end of the year,” he said in November. “I’ll have 250 stores of that brand by this time next year.”
Steele 365 needs to be tested with corporate stores first, beyond its home market, before franchising will begin. Smiley believes in “taking a traditional model, open 365 days a year, and infusing service into the concept,” he says. “Service is not dead.”
They’re charging $79 a month for now and they plan to cap membership at around 300, to avoid overcrowded facilities. He’ll continue to push high design, a trademark feature at his original clubs, which offered personal training at $90-plus an hour in gleaming surroundings and promoted with sexy ads. “The world loves beauty,” Smiley says about his penchant for design. “Just because it works doesn’t mean it can’t be beautiful.”
Architectural lighting, cedar lockers, $72 body moisturizer—all are in the prototype, and Smiley insists they’ll stay, although the costs for a franchise are questionable. Smiley was educated at the University of Virginia with the intent to head to Wall Street. “I was supposed to be an investment banker,” he says, and that background makes him intently focused on unit economics.
Both he and Taunton are vowing to keep up the acquisition pace. “I don’t watch anyone. I think they watch me,” he replies when asked what competitors he tracks, and once again displays his trademark confidence. “They can always watch what you’ve done, but they can’t watch what we’re going to do.”