Casper IPO puts $1B unicorns in crosshairs

The IPO market is off to a rocky start in 2020

Casper Sleep Inc.’s dreams of becoming a $1 billion company were dashed Thursday after going public at a valuation of less than half that.

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The New York-based online mattress retailer debuted on the New York Stock Exchange at a valuation of $470 million, continuing the trend of not-so-impressive initial public offerings by money-losing companies.

TickerSecurityLastChangeChange %
CSPRCASPER SLEEP INC7.06+0.15+2.17%

Casper's lackluster debut is yet another reminder that hot startups still need a reality check.

“You've consistently had a problem now where venture capitalists, especially the later-stage venture capitalists, have written checks that are too big,” Bradley Tusk, CEO of New York-based venture capital firm Tusk Holdings, told FOX Business.

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Warning signs in the IPO market bubbled to the surface last year when a number of money-losing companies, including Uber and Pinterest, saw their share prices plunge in the wake of their stock market debuts.

The problems in the space reached a pinnacle in October, when office-sharing company WeWork, which was valued as high as $74 billion in the private market, pulled the plug on its IPO after receiving word that it would be valued at between $10 billion and $12 billion on the public market.

“It's not that these companies shouldn't IPO, it's that when they hit their later stages of venture funding, their series E, F, G, they shouldn't be at these multibillion-dollar valuations because if the IPO ultimately is going to be half of that, than late-stage investors are going to lose money,” Tusk said.

“So I think you have to first start seeing those rounds start to reconcile with reality. And then after that, the IPOs should be okay,” he added.

Casper’s struggle to garner the top dollar it received in the private market will put pressure on other high-growth direct-to-consumer brands like Warby Parker, Away and Honest Company to show profitability or near-profitability as they prepare for potential stock market debuts later this year. Non-consumer names like Robinhood, DoorDash, Postmates and Houzz will be under similar pressure.

“We have already seen, obviously with Casper, that investors are very skeptical and not willing to just buy the growth story and ignore the losses,” Nick Smith, research analyst at IPO investment research provider Renaissance Capital, told FOX Business. “So I definitely think with the pipeline very full of currently billion-dollar-plus valued companies that investors will be skeptical of those going forward.”

TickerSecurityLastChangeChange %
WORKSLACK TECHNOLOGIES INC.35.05+2.51+7.71%
SPOTSPOTIFY TECHNOLOGY180.93+3.71+2.09%

He thinks a number of unicorns, or startups with a valuation of $1 billion or more, including the online lodging marketplace Airbnb and the collaboration-software provider Asana, will follow Slack and Spotify in opting for direct listings instead of going through the IPO process.

A direct listing is a way for companies to list shares on a public exchange while bypassing the need to issue new shares. While a company going the direct listing route avoids many of the fees associated with the IPO process, it leaves price discovery to the whims of the market.

While a number of money-losing companies that went public last year saw their share prices suffer, the IPO market as a whole still seems to be rather healthy.

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TickerSecurityLastChangeChange %
IPORENAISSANCE CAP GREENWICH FUNDS IPO ETF36.73+1.60+4.55%

The Renaissance IPO ETF, which tracks sizeable new companies for the two years after they go public, is up 8 percent year to date after gaining 33.7 percent in 2019.