Casper's Business Model: Burn All the Money Hidden Under the Mattress

Mattress and pillow startup Casper announced it is going public Friday, and its filing with the federal government looks like many of the companies that had IPOs last year: It lost money in the past, it loses money now, it plans to lose more money in the future, and might never be profitable.

The public offering will be underwritten by financial institutions like Morgan Stanley and Goldman Sachs, big banks that helped inflate the public valuations of tech companies like Uber, Lyft, and WeWork—valuations which have cratered since IPO day, but only enough to hurt late, public investors not early, private ones.

Casper’s S-1 is also full of silly terminology and graphics. Early on, Casper makes clear that they are gunning to monopolize the $432 billion "Sleep Economy." with the help of its “Sleep Arc.” What's the Sleep Economy? Well, we don't know either because Casper never really defines it, but it seems to have something to do with a "wellness equation" that has three pillars (fitness, nutrition, sleep) that are now "major consumer categories."

The Sleep Arc is Casper's belief that "sleep consists of more than just the act of sleeping, and instead, includes the entire set of human behaviors that span from bedtime to wake-up and affect sleep quality." In English, that means it seeks to commodify everything remotely related to sleep and its quality because they are all inputs into a “wellness equation.”

It's important to skip most of this nonsense and go directly to the RISK FACTORS section, where Casper admits—because it is legally required to—that it "may not achieve profitability when expected, or at all."

Casper's RISK FACTORS section is 44 pages long and includes reasoning such as:

“We have a history of losses and expect to have operating losses and negative cash flow as we continue to expand our business.”

In 2017 and 2018, it had net losses of $73.4 million then $92.1 million. It had built a $232.2 million deficit by December 31, 2018. It has never earned a profit and consistently throughout warn it may never happen. Despite this, Casper is privately valued at $1.1 billion.

“Our future growth and profitability depend on the effectiveness and efficiency of our marketing programs.”

Casper’s self-professed goal of monopolizing the Sleep Economy and Sleep Arc requires it to “disrupt” established competitors with loyal audiences, their own monopolies, and other barriers to entry. To that end, Casper’s marketing programs will also include ways to leverage its millions in investor capital. Sometimes, that means subsidizing the prices so consumers choose their product. Other times, it means a generous returns/discount program if a customer is unsatisfied with their mattress. Either way, the goal is to leverage the investor capital their competitors don’t have to eventually drive them out of business because their product isn’t good or different enough to do so without anti-competitive behavior.

“We currently rely exclusively on third-party contract manufacturers whose efforts we are unable to fully control…Our third-party manufacturers are subject to regulatory requirements, and it is difficult to monitor and control their compliance with such laws, rules and regulations.”

That means its profitability might be hurt by something as simple as wage increases for laborers along its supply chain, or as big as fines over “unethical” business practices by third-parties whether it be its sourcing of materials, the toxicity of those materials, the labor involved in extracting or refining them, or anything in between.

“An increase in our return rates beyond historical levels could have a material adverse effect on our revenue, cash flows and reputation.”

Stephanie Yang at the Wall Street Journal reported on how Casper customers had found a way to have a "virtually limitless supply of brand-new mattresses that, other than one's dignity, cost nothing—that is, as long as they remember to return the mattresses in time." Buried in Casper's S-1 is the quiet admission that in 2019, it saw $390 million in sales, but lost $80 million in returns, refunds, and discounts (from the aforementioned marketing).