Editor's note: Inc. magazine's 2018 Company of the Year is Bird. Here, we spotlight a contender for the title.
The mattress wars are as intense as ever.
Mattress Firm, the country's biggest traditional mattress seller, filed for bankruptcy protection in October and will emerge with at least 700 fewer stores. Meanwhile, hundreds of online direct-to-consumer brands now are vying for the title of America's No. 1 mattress.
While Casper, with $240 million in venture funding, has captured about 10 percent of all online U.S. mattress sales, according to estimates from the mattress-research company GoodBed, arguably the bigger story in the industry in 2018 was Tuft & Needle. The Phoenix-based startup clawed its way to a roughly 5 percent share of all online mattress sales and will generate between $180 million and $200 million in revenue this year, according to estimates by KeyBanc Capital Markets. In September, the company made a momentous decision to super-charge its growth: Tuft & Needle merged with competitor Serta Simmons Bedding, the largest traditional mattress manufacturer in the U.S. The deal, reportedly valued at a half billion dollars, will join the startup to a company that owns 40 percent of the mattress market.
Not bad for a company that never took any outside investment.
Bootstrapped From Zero to $170 Million
A bad mattress-shopping experience led software engineers John-Thomas Marino and Daehee Park to start Tuft & Needle in 2012 with $6,000 of their own money and, later, a $500,000 loan. (Brands like Casper and Purple would emerge after.) An intense focus on data analysis--both to improve the product and eventually to determine the most effective locations for the brand's four retail stores (with two more in the coming months)--helped fuel the growth. So, too, did positive reviews and word of mouth. (Only 4 percent of customers return a Tuft & Needle mattress, compared with the industry average of 11 percent, according to KeyBanc.) In 2013, the company pulled in $1 million in sales. Two years later, revenue hit $45 million and then in 2017 it quadrupled to $170 million.
By the summer of 2017, Tuft & Needle had grown to 130 employees and moved its headquarters to a historic warehouse in Phoenix. The company was growing like crazy, Marino says--to the point of almost being unmanageable. While Tuft & Needle partnered with stores like Crate & Barrel and Lowe's to increase distribution, the co-founders knew that future growth would have to come from expanding its own retail footprint. The problem was they didn't have enough cash to run stores in 12 to 24 cities all at once.
They decided they finally would need to raise outside capital, so they calculated exactly how much they needed: $20 million. It was enough to accelerate its retail store expansion, but not so much that they would lose control or need to make dicey decisions to grow at a break-neck pace.
"Because when you build something you love, and you know it's yours and there's nobody who can tell you no, it's your way," Marino says. "When you decide to bring someone else in you don't know, it's sort of a gamble. That's a little scary."
In the end, investors didn't want in on such a small round. They pushed the company to raise a higher amount--the co-founders decline to say how much--but Marino and Park didn't want to raise more than they needed.
"It's often really hard as an entrepreneur to turn away money," says Asher Hochberg, vice president of CircleUp, an investment firm that funds early-stage consumer startups. "You have very smart investors coming to you--'Now I'm going to make you a ton of money trust me, you want a much bigger round than you have.' An entrepreneur has to say, thanks for this, but I actually don't want that money. It shows a lot of maturity and frankly wisdom to take on less capital than you need."
As they were meeting with different investors and equity firms, Marino and Park ran into the shareholders of Serta Simmons this spring. They had never considered talking with an incumbent brand or competitor. As they looked around, they concluded that the fast growth of the VC-backed online brands was looking less sustainable in the long run.
"The disruption is coming to a peak," Marino remembers thinking. If they were going to put the foot on the gas, they decided they were going to need a different strategy and a strong retail partner.
The deal made sense: Serta didn't have Tuft & Needle's e-commerce or customer service background. Tuft & Needle, in exchange, would become part of Serta's $3 billion revenue operation, which has an established supply chain that can offer the startup faster delivery, expansion overseas, and potentially lower product prices.
While the newly merged company has several big advantages going for it, it is also facing some significant challenges. In addition to leading their 166-person team, Tuft & Needle's co-founders are tasked with rebooting traditional brands like Beautyrest and Serta as well as changing Serta Simmons's internal culture and bringing in new talent.
"There are a lot of processes to break and reiterate," says Marino.
And then there's the competitive threat Amazon poses. Amazon started selling its own line of mattresses online in October. The Federal Trade Commission is looking into a case where U.S. manufacturers have alleged that foam mattresses coming from China are being sold at artificially low prices on Amazon. It's likely Amazon will have to pay a penalty, which may help upstart brands, says Bradley Thomas, KeyBanc Capital Markets senior equity research analyst.
Marino and Park, meanwhile, are clear on their goal: They want to be the No. 1 brand in five years.
"We can actually influence the entire mattress industry with each move we make. Now here the other big companies have to follow us," says Marino. "To be honest, that's freaking awesome."