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By Eliot Brown 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 25, 2020).

Mattress startup Casper Sleep Inc. typifies the kind of startup that Silicon Valley investors fawned over through the 2010s, defined by big vision and rapid growth at the expense of profits.

Now, it is seeking to go public at the very time that such a model appears to have fallen out of favor, in a test of what is to come for dozens of similar loss-heavy startups that need to raise money as private fundraising becomes more difficult.

The mood in Silicon Valley has changed dramatically in the past year, as Wall Street investors have proven far less enamored with many high-profile, high-loss startups than venture capitalists expected. Uber Technologies Inc.'s stock is down 16% since its listing last year, and Lyft Inc.'s is down 32%, while the Nasdaq composite index is up over 18%. Their experience, along with the failed effort to go public by WeWork parent We Co., have left startup financiers fearing the same fate for their own investments, and sparked a scramble across Silicon Valley to stanch the flow of red ink.

New York-based Casper, which this month filed paperwork for a planned initial public offering, is considerably smaller than the ridehailing companies and WeWork. But it shares traits, most notably a tendency toward burning through capital and a business model vulnerable to intense competition.

For the first nine months of last year, Casper reported a net loss of $67 million on $312 million of revenue, with $54 million of cash. It has raised more than $300 million from investors, with a valuation on the private markets of $1.1 billion, and sought additional private funding late last year, according to people familiar with the matter. That funding was never finalized, and now it is seeking much-needed cash on the public markets.

The company has for years been marketing itself like a tech startup, though its IPO prospectus emphasizes other key selling points, such as the rapid growth of its brand. In six years, it has become a leading name in mattresses -- aided by $422 million in marketing in the past four years alone. Its IPO prospectus cited a survey that 31% of the U.S. is aware of its brand.

Casper says that brand -- and marketing spending -- set it up well to play into a growing category it calls the "global sleep economy," which includes everything from pillows to sheets to sleep-tracking devices. Meanwhile, old incumbent mattress sellers have struggled with years of slow growth.

The company also is pushing a non-tech approach: expanding its retail store footprint, which it says is "complementary, not cannibalistic" to its online sales. It can point to revenue that is continuing to grow significantly faster than losses -- a trait not shared by WeWork.

David Hsu, a management professor at the University of Pennsylvania's Wharton business school, said the company is burning large sums of money on marketing and could face a tough reception on Wall Street given the new environment. "There's more discipline in today's financial markets," Mr. Hsu said.

The effects of that newfound discipline are rippling broadly. A string of high-profile startups has engaged in cost cutting and layoffs in the past few weeks, including Oyo Hotels & Homes, delivery company Rappi Inc. and scooter company Lime Inc. That follows recent guidance from the largest funder of such companies, SoftBank Group Corp., that the startups it backs should move toward profitability -- reversing its prior emphasis on growth.

Fundraising for such startups has become far more difficult.

Companies including Lime and food delivery-focused DoorDash Inc. -- once able to raise large infusions of cash with little trouble -- both sought to raise hundreds of millions of dollars in the past three months and haven't yet succeeded, people familiar with the attempts said.

Of course, any chill could be fleeting. Money continues to pour into venture capital funds by the billions, as yield-starved investors remain anxious of missing the next big thing. Having soured on consumer tech, venture capitalists say interest has recently begun to soar in financial-related startups, or "fintech."

The experience of Casper offers a window into consumer-focused startups more broadly. Companies including Casper, luggage-maker Away and sneakers seller Allbirds pioneered a new business model selling products directly to consumers instead of through other retailers, often via Google and Facebook ads. Many of them have tech-like valuations and ambitions to go public. Five-year-old Away Luggage's $1.4 billion valuation is nearly half the $3.1 billion market capitalization of luggage leader Samsonite International S.A.

Casper, which delivers compressed foam beds direct to customers' doors, launched in 2014 seeking to disrupt the mattress industry by cutting out middlemen and drawing customers happy to avoid slogging to mattress stores.

Its early approach -- which is mostly unchanged today -- was sprinkled with tropes and strategies commonplace among startups aiming at millennials. It paired clever advertising with a friendly brand written in sans serif font in a soothing shade of blue. Celebrity investors like Leonardo DiCaprio were touted. Executives trumpeted an origin story in which the co-founders realized the value of sleep after they were overworked in a startup incubator. Executives less frequently mentioned that co-founder and Chief Executive Philip Krim previously ran an online mattress company he eventually sold.

Casper ads flooded podcasts, Instagram and the New York City subway. The company fashioned itself as "the Nike of sleep," rather than just a mattress seller, expanding into products like pillows and dog beds and telling investors it was poised to dominate a sleeping-related market it estimates at $432 billion. It launched a magazine devoted to wellness and comfort, with many stories on sleep.

As sales surged, money rushed in from venture capital investors, who assigned very high valuations for a mattress company.

Its early success spawned imitators who realized the basic business model was easy to replicate. Competitors found that Casper didn't make its own mattresses but procured them from a handful of U.S. foam factories that supply numerous brands.

Work piled into these factories from dozens of competitors, who could start companies with little more than a logo and website. They found the process easy given that some factories design, produce and ship the mattresses directly to consumers for the companies. Casper said in its prospectus that one challenge of the business was its manufacturers share "competitively sensitive information with our competitors."

But the new entrants in the market -- including Purple Innovation Inc. and Leesa Sleep LLC -- meant that prices for online ads targeting mattress-inclined millennials soared ever higher, dimming the hopes of making a profit.

Purple, a main competitor that went public through a shell company a couple of years ago, recently turned a profit and sports a faster growth rate. The stock has almost doubled in the past year, and its $304 million of revenue in the first nine months of 2019 was just shy of Casper's $312 million.

Sam Bernards, the former CEO of Purple, said he tracked more than 200 similar companies in the space at the height. While many were small, they were "all competing for the same keywords on Google, and the same on Facebook."

The result, he said, was "just economics 101. The more competition, the higher the spend."

Casper spent $126 million on sales and marketing in 2018, or 36% of its revenue, down from 42% in 2017.

To find new forms of growth, Casper began opening stores in malls and hip retail strips, requiring new investment and employees. Then it started selling through other retailers too, including U.S. furniture chain Raymour & Flannigan, adding a middleman and the costs that come with it. Casper said its online sales have grown faster in cities with retail stores, suggesting they spur online growth too.

Incumbent online retailers including Amazon.com Inc. and Walmart Inc. began making their own mattresses, undercutting the others on price. Casper's lowest-price queen mattress is listed on its website for $536. An Amazon-branded memory foam queen-sized mattress sells for $289.

Casper's revenue in the first nine months of 2019 grew 20% from a year earlier and full-year revenue in 2018 climbed 43%.

"Twenty percent growth isn't that high given the size of the operating losses," said Jason Stoffer, a partner at venture capital firm Maveron. He said ideally, a strong direct-to-consumer company would be closer to profitability at this point.

Write to Eliot Brown at eliot.brown@wsj.com

(END) Dow Jones Newswires

January 25, 2020 02:47 ET (07:47 GMT)

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