Welcome to Compound Interest from Semafor Business. I'm Liz Hoffman, Semafor's business and finance editor, joined by my colleague Ron Biswani. Ron, what are we writing about? What are we thinking about this week?
Well, as you and I, you know, we can't escape private credit, we can't escape the war in Iran. It does feel like we're at a very strange moment where a lot of things are going to come home to roost, right? Like energy markets are crazy, stock markets are going wild, bonds are selling off. It's been a crazy week for us here.
Yeah, bad bad chickens. Very bad chickens. I don't What does that What does that mean? Roost. Bad chickens. Oh, bad chickens.
Don't you want them to come home to roost though? I'm I'm being trapped by my I don't know. Is this Is this intro already gone off the off the rails?
No, no, we're good. We can All right, I'm pulling it back. I'm pulling it back.
land here. It's fine. It's all good. We are We were going to do something a little lighter this week. Um Which is that our guest today is is Tom Hale, who's the CEO of Oura. This is the startup that makes, you know, the Oura ring, which is sort of part sleep tracker morphing into kind of a broader health wearable and a particular kind of a status symbol for like a particular kind of elite life hack maxer.
Mhm. Um Valley bros who want to live forever.
Correct. Correct. Um and I suspect that Tom actually wants us to be less of a status symbol for that particular group and more of a of a mass market um wearable. But you know, they're right at the middle of a bunch of these fascinating dynamics in the business world right now. It's a subscription business at a time when customers are getting tired of subscriptions. You know, even if Wall Street is totally in love with them. You know, it is a rare European unicorn that just moved to the US.
Where was it founded? Uh Finland. Oh, interesting. Tom is not Finnish, should be pretty clear when we talk to him. But you know, it's a military contractor, it works with the Pentagon at a time when that is increasingly fraught, as we've seen over the last few weeks with OpenAI and Anthropic. Want to talk to Tom about his IPO plans.
Mhm. And I'm kind of what the future of wearables looks like. That is just a wide-open space right now.
It's almost like the next frontier of where the AI fight is going to be, the input device, right? Like we have these weird pins, we have these weird things. Apple's getting into hand tracking. It does feel like everyone in this space has one eye on the sort of agentic world, but in a much realer way than other industries do, in a much more eminent way.
Yeah, and I think, you know, for all the the discussion right now around software, there there is going to be a hardware device that wins this race. You know, it's it Look, you look back now and it's inevitable that it was the iPhone, but I you know, perhaps as little bit of a a trope on the show, I'm older than you and and like I remember Palm Pilots and Trios and obviously watch hours.
those. I will I will tell you that.
Um all right. All right. You can get your your street cred that way. But you know, I think like it is inevitable now we look back that the iPhone won, but it was not remotely inevitable then and this one feels way more wide open to me. So, um yeah, I think, you know, Tom is right in the middle of all of these really interesting conversations. At the same time, you know, trying to take a pretty valuable startup um public in the in the not too distant future. So, lots to talk to him about.
I mean, what would you want as your AI interface, physical interface of choice? Glasses or rings? What do you
Glasses feels right, though. I don't know. If it was a chip in my brain, um but just like got me to stop looking down and look up in the world, that feels better to me. I don't know.
Yeah. Well, look, neither you and or I are AI hardware experts, so why don't we take a quick break and we'll come back with Tom.
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Tom, welcome to the show. Thanks for coming.
Thank you, Liz. It's a pleasure to be here.
We're hearing a lot about peak subscription, that consumers are getting weary of all of these recurring bills. Yours is a subscription business. Um these rings might They do look nice, but they don't do a lot without the data. So, how do you think about that and what's your what's your read on consumers' desire to keep every month giving you money?
I think peak subscription refers to subscriptions that don't deliver a lot of value. Because it's so easy, I think, to sign up for an app or, you know, a service and then maybe even forget about it and then 6 months later you look at it and say, 'I haven't been using this or I haven't been consuming it.' You know, mathematically you might describe this as the the V over P ratio, you know, the value over price ratio. If you're getting, you know, two two and a half, three, four times, you know, your price in terms of the value, you know what you don't do? Churn. You know what you don't do? Complain about it, because you're getting the value. And that's really the key. And I think when people talk about subscription fatigue, what they really mean is there's too many subscriptions that don't provide enough value and they're, you know, they're emptying your wallet without giving you anything in return. I think that's really not true of Oura. The first way I think about that is the retention, because retention is really the measure of like whether or not you're getting enough V for your P. And uh you know, our retention is famously off the charts. You know, you think about consumer subscription services like Spotify, Netflix. We retain better at 12 and 24 months than those services by a country mile. It's pretty interesting. Um now, you might say, 'Well, why is that?' Well, when you think When you think about it, the kinds of things that Oura delivers for you um and and I don't know if you guys are Oura users, but for those who who who uh do, they probably understand this.
you were going to ask me and I do have a stock answer, which is that I know that I sleep terribly and I don't need to be reminded of it every morning.
Yeah. And you know, it's funny that's a stock answer in in the sense that it's like it's an answer that you would pull out if you didn't actually know what you were talking about, right? It's sort of the easy answer.
I like it. No shade. No shade, Liz. I'm just I'm just trying to trying to tell you. Because because the the you know, one of the things that people value, if you think about that, you think about for someone who's trying to get pregnant, so one of again, one of the classic use cases is what is your fertile window? It's actually a class one medical device that Oura provides. And what, you know, what what most people know if if if they've ever tried to get pregnant or been a couple, you know, a part of a partnership trying to get pregnant. What they figure out is that taking a a luteinizing hormone test tells you after you've ovulated, which means that your fertile window is about the two days after ovulation where your, you know, your fertility is is sort of at its peak. The thing that we do is we make a prediction about your fertile window, which is five days. And that means twice the opportunities to get pregnant. So, when people stop me in the airport because I'm wearing an Oura t-shirt or an Oura sweatshirt and they say, 'Hey, you work for Oura?' And I say, 'Yeah, I work for Oura.' And they say, 'Oh, wow, thank you so much. You helped us get pregnant.' Again, that's a lot of V. And what was happening for me, I just to, you know, kind of put it in in perspective. So, I was 54 at the time, you know, maybe just about to turn 54. And for the first time in my life I had lost sleep. I don't know if you guys have ever lost sleep. Maybe you're, you know, maybe you've never had that happen. But for me it was a combination of COVID, stress in my family. We had sold a company, it was in the process of being unsold. And there was quite a lot of stress in my life. And so, for the first time, after after a lifetime of being able to fall asleep in minutes and staying asleep until, you know, someone roused me out of the bed in the morning, for the first time I could not fall asleep and I could not stay asleep. And, you know, I think some of it was stress, I think some of it was aging. Whatever. And and so, what what Oura sort of maybe showed me was uh a little bit down the path of like how to optimize for sleep. I should stop drinking coffee in the mornings, I should stop drinking wine at night, I should not look at my phone before I go to bed, I should sleep in a colder room. And and by the way, in that moment when I changed my behaviors and sort of regained sleep, it was transformative. I actually realized I'd been sleep deprived most of my adult life. That's a lot of value. And so, I come back to like, 'What's What's a subscription?' Well, a subscription is an exchange for value over time for money. I'm going to maybe objection foundation on your question about um subscription fatigue, because what I'm really saying is that if you deliver value, I don't think there is subscription fatigue. And if you don't deliver value, there is subscription fatigue and you should, you know, you should you know, throw your subscription out.
Yeah, we talked about this, you and I, maybe six or eight months ago and you you whipped out a data point that I'll actually ask you to share with our listeners now. It was It had something to do with the the discount for annual subscriptions versus monthlies and sort of what it tells you about what the company is expecting.
Yeah, sure. One of the ways that you can kind of decompose the monthly churn is you can look at the degree of discount between the annual subscription and the monthly subscription. Because if you are, you know, thinking about your subscription business as a way to kind of get people to commit to your product for a longer term, you'll price the annual subscription at a discount to 12 times the monthly subscription. Because what you're trying to say is, 'Hey, sign up for a for a year and what we'll do is we'll give you a discount and and that's the incentive for you to do it.' And if you, you know, think about that that uh ratio of $6 and of of Oura per month multiplied by 12, that's $72. We price at $70. So, it's a very, very slight discount. And what's interesting is we get people signing up for the product and paying an annual subscription in ridiculous numbers, you know, kind of north of 50%. They're not choosing it because of the price. Right? They're not making some some like, 'Wow, I'm saving a whole $2. What an incredible incentive to sign up for a year.' But if you look at other subscriptions and you look at the ratio of monthly to annual, you'll start to see the degree to which they discount the annual subscription from 12 times the monthly tells you how bad their retention is.
There's been some reporting that you're IPO bound and I think, you know, the multiple on a hardware versus a software company, those look very different. So, I guess if you are making your case this week right now, are you asking to be valued as a software company or
First of all, we're not we're not making any cases to anybody. I that you know, rumors are such a funny thing. People People are so excited about stuff that that, you know, they go off and they say things that that, you know,
Um So, you guys aren't prepping. I know The Information and I think a couple other outlets said you were prepping for an IPO. That's not in the cards in the short term.
You know, like here's the thing, what they reported was we were talking to banks. That's what they said. So, the fact is we talk to banks all the time. It's not, you know, not that unusual. But the meta point and I think you guys you guys are on it, which is like um you know, when when you talk about a business um in hardware and software I don't think this kind of you know, idea of valuing uh Aura as a sort of a software multiple and a hardware multiple is the right way to to think about. In fact, I don't think anybody uh in their right mind would think about. The way you think about it is what is the combination of software and hardware as a business in terms of delivering value for customers and what's the TAM that you operate in. Turns out our TAM is enormous. The TAM is everybody on the planet who goes to sleep at night. If you just look at the wearables market um you know, the wearables market every year is somewhere between 200 or so million devices each year. And that includes all kinds of wearables, mostly smartwatches, bands, you know, a little bit of smart rings and stuff like that. And we are the undisputed champion and leader in the smart ring category and we're like between 1 and 2% of that 200 million. So, for us our TAM is just gaining share in the wearables marketplace. Makes it very easy for us to imagine doubling, tripling, quadrupling our business simply because there's plenty of head room for us to take share. We don't have to displace someone, you know, off the wrist. We just have to get them to add something on their finger. A wrist wearable tells you lots of stuff. It's got a small screen. It's got it's battery consumptive. All those things are super useful during the day. But you know, a lot of people won't sleep with one. Why? Well, because it's kind of big and uncomfortable and you know, it's lights up in the middle of the night and if you're having trouble sleeping, that's literally the last thing you want to see is something blinking at you saying it's 3:19 a.m. Rohan, you know, are you awake or asleep? And you're like, I'm awake and boy am I unhappy about that.
Is that finger versus wrist thing a an elbow at Whoop which just raised a bunch of money a couple of days ago? Um yeah, I think approaching you in valuation if if I can't remember where are you guys?
You're at Well, I think about a year ago we were 11 billion and since that time we probably you know, maybe we probably doubled our our revenue. So, I don't know, do your math.
Okay, so they just cracked 10, right? But you you know, you've had the ring space to yourself for a while now. Though some competition coming in from Samsung, I think Reebok and a lot of them actually have a sort of a no subscription model which I learned when I prepped for this interview, Googled Aura Ring and if then the the auto complete was no subscription and then I got a bunch of ads for uh for Samsung and Khan. And um you know, there's one more before we move off it. Like if and and you made a pretty convincing case on on subscription, but but are you worried about getting outflanked by a by a no sub model?
Well, they've been going at it for a couple years and they haven't made a dent. Um even though you know, they might say oh it has a subscription business model. They generally also say and it's the best made and you know, has the best functionality and all those things. And I think that's important. I I think it's also important to recognize, you know, when you think about sort of subscription as a business model um is that it provides you um you know, call it margin in your business. So, our gross margins um you know, I think you probably know this, but most hardware companies have gross margins in the 40s, right? Um our margins look more like a software business because of the blending of the hardware and the software portions of our business our gross margins are much higher.
Um no, I think I think um you know, if if you think about uh software, you know, they're sort of uh SAS margins which are usually in the 80s. If you're an app, you're usually in the 60s. So, you know, we're we're kind of more in that in that ballpark. And I think what's what's interesting about that um and maybe the way that we think about it is that it provides the ability for us to invest in R&D and science in a way that if you're a pure hardware model, it's actually much harder to do because the way you work in a pure hardware model is you sell the widget and you make your margin. And if you have to discount the widget, which by the way our competition is routinely discounting their product in an attempt to kind of you know, undercut on price, it means that they can't reinvest, you know, the delta between the value that they collect and the price that they charge. They that delta they can't reinvest in um you know, in R&D because they simply don't have it. If they're not able to monetize in the same way that that maybe Aura is able to monetize because all they could do is sell you a a piece of hardware and hope that they make a buck because they have no ongoing, you know, recurring revenue stream, then they can't spend as much to make their product better.
There's a big race to figure out wearables right now, particularly kind of what the device that's going to win in the AI world is. Um you know, you obviously bet on rings, but you got glasses, earbuds, pendants, like whatever Sam Altman and Jony Ive are cooking up at at Open AI. Like lamps, yeah, lamps, who knows. But like what is the device what is going to be to the AI era what the smartphone was to mobile?
Yeah, it's interesting. I think it might actually end up being the smartphone.
Oh gosh. Yeah, I agree with you about the tyranny of the screen. I mean I think of this as a partial attention device, right? I mean every time you look at it, you're removing attention from the humans that you happen to be sitting in the room. And maybe you know, from the perspective of Aura we we are very intentional about not having a screen. You know, the device doesn't have a display for a reason. Now, that that being said, the question is what's going to be the main computing device that's going to provide, you know, intelligence and intelligence agentic services? Well, it's going to probably be connected to the network. It's probably going to you know, have some kind of voice interface and a speaker to talk back to you. Um it might have some kind of screen or maybe maybe not, although I think there's a lot of value um in screens, you know, I like looking at pictures of my kids or my dogs or places that I visit and stuff like that. I also like taking pictures. I just I wonder if um if something's really going to replace that or is is is there going to be even if you have a set of smart glasses um if there has to be a device to that is you know, computing and storing battery um that that is like a puck that does the same thing. It's got a big battery cuz these you know, AI applications are relatively power hungry and you require a lot of you know, GPU and CPU to make it work if you got to make it work on the edge. And you need a radio that's constantly connected to the network. All those things take power. And so I I just wonder if if if it doesn't look something like maybe it's going to be a different kind of phone but it's going to do the same things. So, I I don't know. You guys tell me. I'd be interested to hear your opinion. You guys think it's going to be glasses? You think it's going to be earbuds? My my personal view is it's a cloud of devices based on the use case that you got.
Well, look, you laid out the three things that people use Aura for and those are largely passive things, but you also just cut a deal for gesture rec a gesture recognition company, right? Which is a very awake thing. I'm not really pointing and gesticulating uh when I'm sleeping. Is that is that an area that you want to break into, right? The I don't know, the awake space.
I mean we're 24/7 wearable. But maybe to your point about gestures, I mean gestures is pretty interesting. Um I think the you know, I would bet on voice as an interaction layer. But it has some sort of you know, properties of being um linear in terms of the way it consumes time. But I think the other thing is of course, it's also very easy as a user interface. Everybody already knows how to talk.
