Casper Sleep, which rose to prominence on the strength of podcast ads and a foam mattress that expands when its box is opened, has filed to go public.
Seriously. It really shouldn’t have. The U.S. Securities and Exchange Commission Form S-1 shows the company grew about 20% during the first three quarters of 2019, but losses also expanded. For every $1 that came in, about 20 cents was lost.
That’s not supposed to be the way it works. A growth company preparing to go public should have smaller losses than before. A company that’s scaling should be seeing profits ahead.
So why isn’t Casper?
One Weird Trick
Casper talks about being a leader in the “sleep economy,” something that’s worth $80 billion in the U.S. alone. But Casper mainly competes for just one-fifth of that opportunity, mattresses, and lots of other companies do the same thing.
Even in its niche of foam mattresses, which are cheap to ship because they’re compressed and don’t require expensive box springs, there is enormous competition. The key ingredient, called memory foam or temper foam, was developed under NASA contracts in the 1970s. A number of startups have been built around it, with names like Puffy, Saatva, Tuft & Needle and Nectar. Sealy, which has been around for over 100 years, has a foam mattress brand called Cocoon.
The most unique part of Casper is its marketing, where it mostly uses the internet. Specifically, it uses a lot of podcasts. Casper was one of the first brands to be built this way, which has caused an explosion of new podcasts, but the mattress company remains just an advertiser. Casper Sleep also has a generous return policy for which it has been criticized.
Don’t Blame Tech
Casper said it lost $67.4 million during the first three quarters of 2019, on revenue of $312 million. During the same period of 2018, it lost $65.5 million on revenue of almost $260 million. Cost of goods sold rose just 9% between the two periods, but marketing expenses were up 23%, and general administrative expenses 20%.
The bad press being generated by the S-1 is all about the future of tech in the post-We Work era.
But this isn’t a tech story. It’s a market story.
Casper is trying to get money out of a frothy market on the strength of a brand name. Its last funding round, almost a year ago, was led by Target (NYSE:TGT) and brought in $100 million. That’s enough to fund a year of losses. As of last September, the company’s cash balance was down to $54 million.
Casper has always flown on a wave of positive media. Early investors reportedly included actor Leonardo DiCaprio and singer 50 Cent. The company claimed in its last round it would be profitable on an EBITDA basis, that is before interest, taxes, depreciation and amortization, in 2019.
The company says it has found success with physical stores and that its 60 units are profitable. It’s also wholesaling to Target, which is the most likely buyer of the brand if the Casper Sleep IPO fails. Casper badly needs capital to fill out the product line, which currently includes pillows and a nightlight.
The Bottom Line on the Casper Sleep IPO
A Casper rival, Purple Innovation (NASDAQ:PRPL), did a reverse merger into a shell company in 2017 and emerged with a valuation of $1.1 billion. That stock is now worth about $590 million.
That is the bottom line. Casper is trying to evolve from a mattress brand to a sleep brand, and it could do so if it had the right partner.
You’re not it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
