Another money-losing, cash-burning, over-hyped unicorn in a ho-hum low-tech business (bedding retailer) tries to make it out the IPO window while it still can.
By Wolf Richter for WOLF STREET.
It’s tough out there for money-losing, cash-burning startup unicorns that have multiplied like rabbits in recent years. Casper Sleep Inc., which sells foam mattresses and bedding, filed its amended IPO prospectus with the SEC today, with further details on its hoped-for IPO. It will offer to sell 8.35 million shares – and up to 9.6 million shares if the underwriters exercise their over-allotment option in full – at a price range of $17 to $19 a share. An IPO price of $18 a share (with 39,178,344 shares outstanding) will give the company a valuation of $705 million.
This is down 36% from its pre-IPO valuation of $1.1 billion, set at the last round of funding on March 27, 2019, when it had raised $100 million. The share price that investors paid at the time elevated the company into the unicorn cloud.
The timing of that round of funding was very propitious: Two days before the now infamous Lyft IPO on March 29, whose shares plunged 10% in six hours, from the superbly artificial pop to the close. Lyft shares today, at $47.36, are down 47% from that IPO pop. And the IPO world hasn’t been the same since.
But investors in Casper made their deal two days ahead of that Lyft spectacle. These investors that plowed $100 million into the company at a valuation of $1.1 billion included prior investors Target, New Enterprise Associates, and Norwest Venture Partners; and new investors Canada Goose CEO Dani Reiss and Crate & Barrel co-founder Gordon Segal.
Since it’s founding in April 2014, the company has raised $340 million in seven rounds of funding.
Casper has always been about marketing. It sells foam mattresses that are shipped squeezed tightly in a box. All kinds of companies are selling foam mattresses. More recently, it has started selling sheets and duvets and pillows and what not, the kind of stuff that countless online retailers are also selling, including manufacturers in India selling directly to US consumers on platforms such as Amazon.
But Casper’s marketing – very costly marketing – was so effective that it came to my attention in November 2014, just months after its founding. At the time, I received a thick envelope in the mail, addressed to “Resident” and titled “San Francisco Offers.” I opened it! Whoever was trying to get through to me, made it. The envelop contained six glossy, multicolored sheets, each for a different company, all of them startups.
But one sheet caught my attention further. It showed a pretty girl in minimal clothing, sitting by herself in the middle of the glossy sheet, looking longingly at me with a mysterious smile. There was no text. A mail-order bride?
Once I flipped the sheet over, I saw it: “$50 credit” for a mattress. I re-checked the front of the sheet. Turns out, the white surface the girl is sitting on is a bare mattress, and there is the tiny Casper logo vertically attached to the mattress (which I circled in red).
In terms of name-recognition, this form of marketing was a stroke of genius. Since then, Casper’s marketing that it controls has become decidedly more family friendly, with little kids running around in the photos. But it is now heavily focused on marketing via social-media “influencers,” a form of marketing that it doesn’t control and that can go haywire, which is a risk outlined in the prospectus. Altogether, marketing is where the company spends about 36% of its revenues.
In its IPO prospectus, Casper today disclosed that revenues for the three quarters through September 2019 rose 20% year-over-year to $312 million. And to get that $53-million year-over-year increase in revenues, the company spent $114 million in “sales and marketing” expenses.
You see, selling mattresses and bedding is an uphill battle. Everyone is doing it. And so, you’ve got to spend two tons of money for marketing to get one ton of money in additional revenues.
And you know what’s coming. Despite the 20% increase in revenues, the company lost more money than a year earlier: $67 million for the three quarters through September, up from $65 million. OK, it’s small fry compared to the billions of dollars in losses of Uber and others. But Casper, despite its formerly $1.1 billion valuation, is just a small-ish online retailer.
After realizing just how tough it was to compete with everyone and their dog online, including manufacturers in India selling directly to US consumers, Casper decided in 2017 to open some brick-and-mortar stores, just when brick-and-mortar retail is melting down.
Casper, which also partners with Target and other brick-and-mortar retailers, including Costco and Hudson’s Bay Company, now has 60 brick-and-mortar retail stores in the US and Canada.
And the fund-raising round in March last year was specifically designed, among other things, to raise more funds to plow into brick-and-mortar stores. The idea is that you can try out a mattress. “We offer playful, semi-private trial houses in our retail stores and in certain of our retail partnership environments that simulate a sleep experience,” the prospectus says. Would that include the girl in the photo, or similar girls? The prospectus didn’t say.
But when an online retailer thinks that brick-and-mortar stores provide salvation from fierce global online competition, even as brick-and-mortar stores are melting down by the thousands due to that fierce global online competition, there has to be a short-circuit somewhere, either in the thinking process at the company or in the thinking process at investors.
The Casper IPO will test just how much appetite there still is in this market for money-losing overvalued cash-burn machines in ho-hum low-tech businesses, such as bedding.
Meanwhile, investors in the last round of funding, and all prior investors that had already booked the paper gains from that last round, are now contemplating something like a 36% loss if Casper can pull off the IPO at $18 a share.