Casper Sells Sweet Dreams, Hopes to Differentiate from Tech IPO Class of 2019

2019 was a year of reckoning for Silicon Valley giants who decided to dip their toes into the waters of public markets. Highly anticipated IPOs from Uber and Lyft quickly disappointed investors when both companies rapidly broke below their IPO prices. Of course, no discussion of 2019 IPOs would be complete without mentioning WeWork’s failed IPO attempt; amidst concern about WeWork’s profitability and leader, Adam Neumann, WeWork withdrew its S-1 filing in September. Ultimately, WeWork’s IPO attempt resulted in Neumann’s forced exit and a $9.5 billion bailout from SoftBank. Given the failures of venture capital darlings on public markets in 2019, one has to wonder why direct-to-consumer mattress startup Casper filed its S-1 in early January of 2020. Based on the recent IPOs (or lack thereof) of Uber, Lyft, and WeWork, this IPO could quickly turn into a nightmare for Casper. 

A common thread among Uber, Lyft, WeWork, and Casper is posting widening losses and high valuations before their IPO. Sky-high losses are common for high-growth startups – Amazon, for example, posted years of losses before becoming profitable. However, massive losses paired with frothy valuations is sure to spell out a disaster on the public markets. Uber had a private valuation of $76 billion pre-IPO and now has a market cap of $49 billion; Lyft had a private valuation of $15 billion, which fell to a public valuation of $11.6 billion; and before its IPO was cancelled, investment bankers valued WeWork at $10 billion, almost one fifth of its final pre-IPO private valuation of $47 billion by SoftBank. Although Casper hasn’t provided an estimate of its public valuation, its last funding round valued the company at $1.1 billion. $1.1 billion might seem like pennies compared to Uber, Lyft, and WeWork’s valuations, but Casper’s valuation gives it a price-to-sales ratio of approximately 2.7 versus its competitors’ average price-to-sales ratio of approximately 0.8.  

Readers may ask why Lyft, Uber, and WeWork priced their IPOs using unreasonable valuations if the public market wasn’t likely to value the companies at the same price. The culprit for such high valuations: a fundamental misalignment between the goals of the issuing company and its buyers. Although one of the goals of an IPO is to raise capital, another equally important goal is to give early investors a return on the money they poured into the startup. Venture capitalists poured $22 billion into Uber, $5.1 billion into Lyft, $22.5 billion into The We Company (WeWork’s parent company), and $339.7 million into Casper. To justify the risk of their investments to their own investors, venture capital firms need to make a return of at least three times their fund size. To achieve this return, many venture-capital funds rely on unicorn exits from companies like Uber and Casper, resulting in pressure from early investors to convince the public of unbelievable valuations. However, there is a fundamental mismatch between the goals of private and public investors when it comes to public markets. While private investors hope to achieve a return on their risky investments in public markets, public investors are less reluctant to absorb constant losses and a falling stock price, making stock exchanges a risky place for venture capitalists to earn a good return on their investments. 

The game Casper and its early investors are playing is evident in its S-1 filing. Casper is attempting to convince investors that it is the “Nike of sleep”, a company trying to “shift the cultural norms so that hopefully, over time, when people pick a Casper, they’re buying into something a lot bigger than just a slab of memory foam”. Casper is also a “pioneer of the Sleep Economy…[that] brings the benefits of cutting-edge technology, data, and insights directly to consumers”. If these statements sound like pipe dreams to you, you’re not alone. WeWork had similarly flowery language in its prospectus, describing its mission as “to elevate the world’s consciousness” and congratulating itself on being the pioneers of “space-as-a service” membership. WeWork positioned itself as a technology company at the frontier of coworking, even though its main rival IWG was founded in 1989 and is currently profitable. Both Casper and IPO overstated their positions in their respective markets and overestimated their status as technology-integrated companies; if WeWork’s failed IPO is any indicator, investors will have a hard time believing the dream Casper is trying to sell in its prospectus. 

Another unfortunate commonality between Uber, Lyft, WeWork, and Casper is the stiff competition each company faces. Uber and Lyft are in vicious competition; WeWork battles IWG for leases from corporate customers; and Casper fights off a horde of direct-to-consumer mattress entrants, including Purple Innovation, a profitable mattress company with similar revenue to Casper. As demonstrated by Uber, Lyft, and WeWork, fighting off competitors through expensive marketing campaigns funded by the IPO proceeds often isn’t what a company needs. Casper, for example, could gain a competitive advantage over Purple if it was acquired by a mature retailer, who could help Casper scale profitably. 

With widening losses and an overpriced valuation, an exaggerated prospectus that aims to convince investors of a valuation based on a ridiculous price-to-sales ratio, and competition from profitable companies, Casper is eerily similar to Uber, Lyft, and WeWork – all of which failed on the public market or failed to enter it in the first place. It might be your dream to make a fortune buying Casper stock, but remember that any dream can quickly turn into a nightmare.