Uber, Casper, WeWork, Peloton – Unicorns, Out of The Stable?

Lacklustre IPOs of start-ups that command billions in private valuations could be a sign that technology disruptors need to be more than one-trick ponies as they grow up. Or are we reading too much, too soon?

There are many ways to define a Unicorn but the easiest and coolest one is putting them in a billion-bracket. There is a Unicorn – a start-up that has grown to the $1 billion valuation mark, there is a Decacorn – one over the $10 billion level, and a Hectocorn too – yes, someone that trotted past $100 billion.

At the latest count (CB Insights), the total number of Unicorns has galloped to about 452 with a cumulative valuation of $1330 billion.

However, these billion-dollar valuations of the private market have showed a pattern of slash-downs (to even half the original number) when some of these companies come out in the public market. When IPOs kiss dust, the stardust of that staggeringly high growth evaporates and we are forced to question – how much of this sky-high growth is hollow marketing, obsessive customer acquisition chase and money screaming loud in the VC rings. Fizzled out IPOs nudge not just investors and industry-watchers but also entrepreneurs to think hard about actual business fundamentals and sustainability of initial models.

What Peloton started, was continued as a big question with WeWork stepping back in the IPO race. The question gallops even faster when Uber, Lyft and now Casper have shown that private-market valuations and stock-market cap can really go in different directions, throwing tight reins on the future of even the fastest-running start-up.

But hold your horses! Zoom Video Communications, Reynolds Consumer Products, Plaid, Tradeweb – they also began as promising start-ups and have chewed healthy hay in the form of successful IPOs and acquisitions.

So what does the recent Casper IPO letdown tell?

Pratima H asks Professor Len Sherman, an expert in Business Management at the Columbia Business School. With a BS in aeronautical engineering, MS in transportation systems and PhD in transportation economics, MIT, (not to forget a Dean’s Award for Teaching Excellence) Professor Sherman has cut his teeth into many cases from the business landscape throughout his 30 years métier of academic research. He has been on the horse’s back too – having served at Accenture and Booz, Allen & Hamilton. And has been capturing his wisdom in books like – If You’re in a Dogfight, Become a Cat!: Strategies for Long-Term Growth.

He is just the person – passionate and experienced enough – to tell us why Casper’s IPO could be a horse of a different colour when we are questioning the future of unicorns through their public-market performances. Saddle up.

What’s your first reaction to all the harshness of criticism surrounding Casper’s IPO? Is it really ‘the next WeWork’?

Let’s step back and put the criticisms in context. The most common argument is that mattresses are a terrible business. People don’t buy them very often. There’s too much resistance to buying sight unseen and way too many competitors. But when Casper started in 2014, it was (unlike Uber, Doordash, WeWork, Oyo, Katerra, Brandless and countless other Softbank investments) a well-grounded approach. The others were inherently low-profit businesses. Casper came in a category where gross margins were as high as 50 per cent but customer satisfaction was low. They tapped a new technology-compression – for a fundamentally-new business model. They started when growth was considered paramount, and their investors were eagerly funding and urging to the company to scale rapidly.

But have they been too ambitious? With too many me-too rivals?

Yes, but not reckless. Someone had to step up to spur market acceptance and Casper was uniquely willing to do so. There were T&N, Purple and other fast followers which were able to draft behind Casper’s pioneering category building investments. That’s good for them. But when we look at Casper, it has carved industry-leading, positive brand awareness, the largest branded store network, and a deep bench of product-design talent, the broadest product-line and biggest international presence. As to competition, the makings of an industry shakeout aren’t unique to boxed mattresses. We’ve seen it in food delivery, in fintech, in craft beers and canned wines. With oodles of capital, widely available and cheap-enabling technologies (Shopify, FBA) and relatively-low-cost social media channels to reach target customers, it’s gotten easier than ever for startups to leap into new businesses on the cheap.

What is the company’s challenge now?

It has to generate adequate returns from their broad assets, but not to dismantle over-extended assets as with WeWork. The way I see it, this business is already profitable for some players. It can lead to a sizeable opportunity for Casper. But the company has to execute its next development stage well.

As to the issue of mushrooming competition, yes it is challenging to bigger players. But, in reality, there have been and will continue to be brutal shakeouts in several sectors. Casper’s challenge is also faced by Away, Warby Parker, Tom’s, Allbirds and others well respected DTC (Direct to Customer) brands. Go to Amazon and search for Away Luggage. You won’t find Away, of course, but you’ll find seven pages of suitcases with over 400 competing-entries, most at half or less Away’s price. Does that mean Away is doomed to a painful, profitless death? Ditto online eyeglasses, where dozens of competitors undercut Warby Parker every day. The defining question isn’t whether Away or Warby or Allbirds or Casper can survive, it’s how many of the cheap knockoffs will survive. Well - VERY few!

Why Casper could be something that will stay in the race for long?

Casper has built a far more substantial capability foundation for sustainable brand leadership in an attractive, large, profitable category than their competitors. Time will tell if they can achieve a better balance between growth and profits in the years ahead. Casper is following the same playbook as other highly regarded DTC companies like Warby Parker and Away travel (whose profitability is unknown).

Any traps or gaps the company can slip up on?

Casper’s biggest flaw – relative to these other Unicorns – is the choice and need to go public in an extremely hostile environment! The company has exhibited a frenetic expansion phase over the past few years (product/physical retail/international scope). The company may well have to rein in some of the activities (e.g. I’ve never been a big fan of their early international forays). That said – an exceptionally strong brand has been built by them. We also cannot miss the part that they also have a good penetration rate and a profitable (unlike Uber) TAM (Total Available Market) size.

But what about strategic advantages that tech-disruptors lack when compared to strong incumbents? Like – Casper doesn’t manufacture its own mattresses?

Since when does this disqualify a company that designs their own products but outsources manufacturing, of components or assembly, like Apple, BMW and any luxury fashion brand? Away suitcases and Warby Parker glasses are outsourced to plants in China. Does anyone know or care?

Should these start-ups watch out for costs going out of control?

True. Casper got over their skis, buoyed by early success, passionate belief in a founding vision and the promise of unlimited capital to fuel further expansion. Easy capital has come to a crashing halt, and we’ll undoubtedly see course-corrections in the focus and allocation of Casper’s capital in the months ahead.

So let us put the question of skepticism to sleep – for now?

My bottom line is this – Casper has built a leading position in a large, potentially profitable category that they largely created. They have invested heavily in building valuable assets that directly support their differentiated strategic mission. Profitable competitors (T&N, Purple) have drafted behind Casper to achieve early profitability, but lack Casper’s upside potential (product and global breadth) and margin potential (greater reliance on branded distribution). But Casper’s key challenge is to harness its assets to achieve sustainable profits.

How would your report card score them?

They get an A for strategic vision and ‘Incomplete’ for execution. I, for one, don’t write them off, but neither do they get a pass until they can deliver sustainable profitability.