Here's why Casper's disappointing IPO could spell disaster for other unicorns
- Casper's IPO could spell bad news for other startups looking to go public this year.
- The company went public at a market capitalization that was less than half the $1.1 billion valuation venture investors gave it a year ago, and it raised far less money than it initial expected.
- Casper was likely hurt by the fact that it's losing substantial amounts of money and that it tried to portray itself as a tech firm when it really wasn't one, business experts told Business Insider.
- Startups that are losing money or don't have real claims to being tech companies could see similar pushback if they try to go IPO anytime soon, they said.
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Casper's initial public offering may well give nightmares to the backers of other startups that are hoping to go public this year.
A year ago, the venture backers of the online mattress company valued it at $1.1 billion. But in the IPO, public investors said Casper wasn't even worth half that amount. Perhaps worse, the offering yielded far less cash for Casper than it initially hoped for - an important consideration for a company that's been rapidly burning through its stash.
The company's disappointing IPO should worry other unicorns - venture-backed startups with valuations of $1 billion or more - business and financial experts told Business Insider. Many of those companies are losing money, despite being in business for years, and many of them have only weak claims to being tech companies.
Casper's IPO "really bodes poorly for those companies who aren't making money yet, regardless of what sector they're in," Phillip Braun, a finance professor at Northwestern's Kellogg School of Management, said. "So, I think the market is being more risk averse towards these unicorns than they have in the past."
Even before it went public on Wednesday, Casper indicated that it expected public investors to be more skeptical of its value than its venture backers were. It initially said that it planned to offer is shares at between $17 and $19 a share. That would have given it a market capitalization of less than $800 million, a significant discount from its valuation last February, when it completed its last venture funding round.
Investors are skeptical of unicorns
But things got worse from there. The company decreased its pricing range to between $12 and $13 on Wednesday and then priced its shares at $12, giving it an initial market capitalization of around $490 million. Although the company's stock popped in its first day of trading on Thursday, rising as high as $15.85 a share, it sold off on Friday. By the close of trading, its stock was at $11.05 a share, putting its shares under their IPO price and giving the company a market capitalization of just $450 million.
In one sense, Casper's IPO was a success, in that it actually went public, unlike WeWork, which aborted its own offering in the face of investor resistance last fall. Some business experts were dubious that Casper would be able to pull it off.
But the fact that it could only do so at such a reduced valuation - and then saw its stock drop below its IPO process on its second day of trading is an indication of just how tough the road is for startups of Casper's ilk right now, the experts said.
"It's a healthy sign that people are skeptical," said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business.
Casper was hurt by its red ink
Part of what likely hurt Casper's IPO is that it's losing money, the expert said. The company expects to post a loss of between $91 million and $96 million for 2019, it said in its public-offering paperwork. That's about the same as in 2018, even though it projected that its sales had grown by 23% over the same period to as much as $441 million. Meanwhile, the company burned through about $73 million in cash from its operations and capital expenditures in just the first nine months of last year.
Over the last year, public investors have become increasingly skeptical of more mature startups that are losing substantial amounts of money. WeWork, which was burning through billions of dollars, wasn't even able to go public. Uber, Lyft, and Slack all saw their stock fall well below their initial prices. Casper is only the latest to see its losses under the microscope.
Unless and until it can turn itself around and show that it has a sustainable business, "I expect that Casper's stock is going to struggle," Hendershott said.
Investors aren't likely to shed their wariness of money-losing startups anytime soon, he said. Indeed, things could get worse in the future, if a high-profile company such as Casper or Uber were to fail after it went public, he said. After Pets.com infamously went bankrupt less than a year after it went public in 2000, investors largely kept their distance from similar companies, he said.
"It's too early to say if in 2020 we've reached a new equilibrium or whether we're going to see an additional level of scrutiny" of loss-making companies, Hendershott said.
Investors recognized that Casper's not a tech company
Casper was also likely hurt by its attempts to masquerade as a tech company, he and other business experts said.
In its IPO documents Casper attempted to portray itself as being on the forefront of sleep technology and pioneering a whole new market - in its case, "the sleep economy." Its pitch was similar to WeWork, which similarly touted its tech investments and called itself a "space-as-a-service" company rather than one that was operating in commercial real estate.
Venture investors may have bought into that hype, but in both cases, public investors saw through it. WeWork abandoned its IPO in the face of investor resistance, even after offering to dramatically slash its valuation. Meanwhile, Casper had to accept a valuation that was much closer to those of other mattress vendors, at least on price-to-sales basis, than that typically seen by tech firms.
"I view it as the market being smart, realizing that Casper's not a tech company and doesn't deserve a high multiple," Braun said.
Startups like Casper or WeWork that operate in old-line industries such as selling consumer goods or offering real estate are on notice that investors will recognize that, despite whatever efforts they may take to disguise that fact, Bruan and other experts said. And the market will value them accordingly.
"People aren't going to put up with marketing bullshit," said Rob Siegel, a lecturer in management at Stanford Graduate School of Business. He continued: "You're a real company or you're not."
Got a tip about Casper or another startup? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
- Read more about Casper's public offering:
- Casper prices its IPO at $12 a share, giving it a valuation of $490 million, confirming that it's no longer a unicorn
- Buzzy mattress maker Casper is pitching itself as a tech company, just like WeWork did. Here why business experts are dubious.
- Casper, the buzzy mattress seller adored by millennials, has a costly returns problem that could be a nightmare for its IPO
- Casper's money-losing mattress business will face a tough IPO path, and some observers think the IPO might even get scrapped
