Widening losses and slowing revenue growth have not been the makings of a successful IPO lately, but they're not stopping mattress startup Casper from giving it a go.

The company known for its tongue-in-cheek advertising and bed-in-a-box reported $67.3 million in losses for the first nine months of last year, up from a $64.7 million net loss in 2018, according to documents filed with the Securities and Exchange Commission. While revenue for that period was up 20 percent to $312.3 million from the year prior, it's significantly lower than the 43 percent revenue growth Casper experienced between 2017 and 2018. 

Given that public investors have soured on money-losing ventures with lofty valuations, some industry watchers argue that Casper is going to have a tough time convincing Wall Street that it's worth the $1.1 billion valuation in attained in 2019.

"They are not the profile of a company that has recently succeeded in the IPO market," says Matthew Kennedy, senior IPO market strategist at Renaissance Capital, a provider of institutional IPO research. "They have good gross margins, but they're not software and they're not a subscription business." 

Founded in 2014, Casper was one of the companies to pioneer selling mattresses online while building a strong, recognizable consumer brand in just a few years. And it has remained a ubiquitous brand in the industry despite the numerous competitors that emerged in its wake. However, one competitor, Purple Innovation, which makes the Purple mattress, has already gone public with comparable revenue and is making a profit. Currently, Purple's market cap is hovering around $580 million.

"Purple has an enterprise value-to-sales of about 1.5x," says Kennedy. "A similar multiple for Casper would imply a valuation closer to $615 million. Given the unprofitability, Casper will have its work cut out for it avoiding a down round."

Casper's task now is to convince prospective investors that the company can get to profitability relatively soon.  

Casper's financials show that it is running an expensive business, says Sucharita Kodali, retail analyst at Forrester research. "It's losing a lot of money, and it doesn't seem like the economics are actually improving," she adds, noting that selling mattresses typically is a "pretty high margin" business. "The question is whether or not people actually believe the story that they can cut back on things like marketing or get some economies of scale to get to profitability." 

Few digitally native direct-to-consumer brands have been able to cut back on marketing and avoid a decline in sales, says Kodali. "If [Casper] can convince people to the contrary, then they are OK," she adds. "It's going to be hard, because anybody who has done their homework will realize that there have not been any case studies of a [DTC] company cutting back on marketing and still growing in a highly competitive space."

In its IPO prospectus, Casper goes to great lengths to market itself as an emerging player in the broader sleep and wellness market rather than just a mattress company. The document is filled with buzzy terms like "sleep economy," used to describe the potential addressable market, and "sleep arc," referring to "the entire set of human behaviors that span from bedtime to wake-up and affect sleep quality."

While the startup began to diversify its products in 2019 by introducing, among other items, a bedside lamp and CBD-infused gummies to help people sleep, it remains to be seen if it will be enough to prove Casper has a solid growth plan to become a much larger company.

"We need to see products from Casper beyond bedding and mattresses that really enable quality sleep," says Natalie Dillon, investor at Maveron, a venture capital firm focused on direct-to-consumer brands. "I think right now their product portfolio is really slim on that side."

One thing that is certain is that Casper's IPO will be the first to test Wall Street's appetite for venture-backed unprofitable companies, following last year's disappointing performances from unicorn darlings Uber and Lyft as well as WeWork's aborted IPO.

Still, it seems WeWork's disastrous IPO process has provided some valuable lessons. Before the WeWork IPO fiasco, Casper had intended to pursue a dual-class listing with one class of common stock and another of supervoting shares for insiders, according to SEC filings. The plan was scrapped in an amendment filed in October 2019, around the time WeWork decided to pull the plug on its IPO, and updated so that all preferred stock will convert to a single class of stock with one vote per share. The company also added two independent directors to its board in December and hired retail veteran Emilie Arel as its president and chief commercial officer, moves likely intended to strengthen its corporate governance.

Casper reportedly has held acquisition talks with retailers including Target, an investor in the company, over the years. The New York Post reports potential buyers haven't offered a price CEO Krim believes Casper is worth taking. Casper declined to comment on the Post's report or on acquisition offers, citing its quiet period leading up to the IPO. With $54 million in the bank, and a burn rate of about $10 million per quarter, Casper needs to raise money fast or risk running out of runway.

"If you just raise another [venture] round, you're just prolonging challenges," says Kodali from Forrester. "There's an election coming up, everybody has been talking about a recession forever, and it's only going to get worse. There's a window of opportunity, and it's not a great story but it's better than it's ever going to be. I think that's what they are thinking: 'Let's get out.'"

Published on: Jan 14, 2020