By Walt Hickey

Welcome to the Numlock Sunday edition. Each week, I'll sit down with an author or a writer, behind one of the stories covered in a previous weekday edition for a casual conversation about what they wrote.

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This week, I spoke to Josh Kosman who wrote “Casper Sleep IPO slipping over fact it doesn’t make its own mattresses” for The New York Post. Here's what I wrote about it:

Casper, a direct to consumer mattress company, is embarking on a roadshow to investors ahead of its IPO on February 5. The startup said its valuation was $750 million on Monday, a steep drop from the $1.1 billion it was valued at after a funding round last year. Here’s one issue that’s caught prospective buyers’ eyes: Casper does not, in fact, make mattresses. They hired Elite Foam, an Atlanta-based company, to produce the mattresses, and later added another manufacturer in Boston to bolster growth. But Elite Foam was bought by Leggett & Platt in Missouri for $1.25 billion last January, meaning that Casper is in bed with the $4.65 billion-in-revenue industry behemoth. Leggett & Platt also supplies parts to rivals Leesa, Serta Simmons, Sealy and more. In short, Casper finds itself in a position where it does not produce its core product, which is going to be a possible pitfall moving forward to say the least.

We spoke about why the mattress space is weird, when a mattress company is not a mattress company, where Casper goes from here, and also we hit on an extremely prescient book that Josh wrote back in 2009 (!) sounding an alarm about private equity’s impact on the global economy.

Josh can be found at the Post and his book is The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy.

This interview has been condensed and edited.

Casper is a company that seems to have every advertisement in New York city locked down, and they're angling to do an IPO pricing this coming week. They were aiming for $1.1 billion, but last Monday you broke that they were slashing the valuation to $750 million. What's going on?

I think the demand has fallen because there are a lot of questions about its earnings, because it's losing a fair amount of money. It's not clear if they see a path to profitability. And especially on the heels of WeWork, and a few other very prominent failed IPOs, I think that investors are looking more critically at companies that are unprofitable. And in the case of Casper, specifically, they're looking critically because there doesn't seem to be a path to profitability.

One of the fascinating things about your story is that one would expect that a mattress company produces mattresses. This is not, in fact, the case. Can you tell me a little bit about what exactly it turns out Casper does?

Sure. Casper is more of a marketing company. They don't make any of their mattresses. And that presents a problem because — like their competitors that also make beds in boxes — they use a combination of latex and foam, and there's nothing that unique about a Casper mattress. The pad is a little different than their peers', but people tell me it's relatively the same. And the folks who make their mattresses are Leggett & Platt, a large publicly-traded company that just last year bought Elite Foam, a foam manufacturer, for $1.25 billion. So Leggett & Platt makes foam for foam beds for Leesa, as well as for Serta Simmons and Tuft & Needle. They are using the same manufacturer that is making similar beds for its competitors, and that would make it hard to force them to reduce manufacturing prices, because if they cut prices for Casper, they'll have to probably cut them for everybody else. So it puts them in a bit of a box.

That's great. The thing that was so fascinating about Leggett & Platt is that there did happen to be a billion-dollar mattress company, but you never heard of and it sold last year. You get a sense that there are dozens, if not hundreds, of these mattress direct-to-consumer startups, but they're all kind of buying from the same places.

They are. And the positive is — and I don't want to be completely critical — bed in a box sales continue to increase. They continue to become a bigger and bigger part of at least low end, $699 to $899 beds. The bed in a boxes are now 10 percent, 15 percent, maybe even growing to a good 20 percent of the market. So that is significant and it is growing. But the problem is, because they don't do their own manufacturing, they're not profitable. And if they stopped spending money on advertising, on marketing, well then that's a problem too because they have competitors. And some big ones are coming, like Amazon, Costco and Walmart, that are all going to be introducing bed-in-boxes. Again, it's difficult to see where they cut costs and increase profitability because if they raise their prices, they have lots of competition, and cutting costs right now is pretty hard.

You wrote that they're billing themselves as "the Nike of sleep." You often times see companies take to this kind of frame of just saying "We're the X of Y." What do they mean by that they're trying to be the Nike of sleep? Are they a mattress company or, as you say, a marketing company?

Well, they're trying to do a little of both. Today — this wasn't in the story, but I'm happy to share this — I was at their IPO road show in New York at the St. Regis Hotel. And what they told potential investors is: we're going to spend more money building stores, building Casper stores, and getting our beds out there at retail. However, they came into the market five or six years ago as the disruptor: selling beds online. So critically, I spoke to one potential investor who said he came in today to the road show thinking, "I might invest. I might buy in the IPO." And he left not impressed because he said that it's basically a whole new model, if Casper tries to be different. And he said, "Well if they do that, then how different are they?"

So again, I think Casper's in a tough spot, where they're unprofitable, and to get themselves to be profitable, they've either got to sell more products per customer or they've got to come up with a brilliant brand new model.

And by the way, today they were answering a question about manufacturing. They said that they would like to — not that they would, I'm not sure they have the money to at this point but they'd like to — build a manufacturing plant for about $10 million. It would take about 12 months to build, but they said they would only be able to build a small percentage of their mattresses through that facility. They think it would give them leverage in driving down prices with manufacturers. So, even though they'd like to go vertical, even they're not talking about going completely vertical. They're just talking about building a small plan.

It's really interesting that they see one of their ways out is increasing the number of products sold per consumer. It seems like, number one, that's really hard with mattresses! I don't know a lot of people who sleep on more than one mattress. And the second is, as you write in this story, that there isn't a ton of brand loyalty in the mattress space to begin with.

It's a difficult proposition. They have built a brand, and that you've got to give them credit for. When you think about the most iconic bed in a box companies, you probably think of them or Purple. They've certainly built a brand, and they got all these celebrity endorsements and investors early on, like Ashton Kutcher. But where do they go from here is a real question mark because they've had sale talks with both Serta Simmons and Tempur-Pedic, and they didn't go anywhere. They had sales talks a year or two ago with Target. That didn't result in a deal. So it seems like they don't have a buyer and it's certainly questionable whether the public markets will be very interested in a company that does have a good brand name but doesn't make a profit, and it's a little hard to see how they find a way to profitability.

To get back to the kind of the beginning of this, the startup had cut its expected valuation to $750 million. Is that still in jeopardy?

"I don't know" is the honest answer. I think — if today was any indication and it was anecdotal — the people I spoke to who were at the presentation weren't that impressed. So I didn't think it went off that well. But they're holding plenty of road shows over the next week. And, to be honest, I only spoke to a few people today. The people I spoke to didn't seem to be blown away today. I think they left with more questions than they had going in.

And I think also an issue for them, to be honest, is beyond our stories, and we might've been the first to write a critical Casper story in the last few weeks and wrote two of them. The Journal also came out with a story that was pretty critical, and so did a few others. I think now, it's not as though they can go public and then people would question the story. I think in this case, because there's been enough of a light shown on them, I think there's a lot of questioning now. It makes it a little bit of a gutsy call to invest in Casper, and that certainly isn't a place you want to be a week before going public.

That they pitched in their road show that they intended to pivot to stores, which is an entirely different business model, that's interesting.

It sounds like they're trying to change the model a bit, and we don't know if it'll work, but the vision doesn't seem that clear. At the end of the presentation, their final PowerPoint slides said "Thank you. Sleep tight." I don't know how tightly or well they're sleeping right now.

Well, thank you for talking to me. I was doing some research before this and it looks like you wrote a book whose topic is seriously prescient right now. Could you tell me a little bit about that? It sounds really cool.

Sure, always happy to talk about it, I wrote a book that came out in 2009, so it's a little while ago now, but it's still very topical, called The Buyout of America.

The Buyout of America is an expose about private equity firms. It's really about leveraged buyout from the KKRs and the Blackstones of the world. It's really the first book — and it's still really the only book — that really takes a look at their impact on businesses. The book is written in a way that I think is for people who are not in finance. In the back of the book, there's an appendix where I looked at the ten biggest buyouts of the ‘90s, just to see how those companies do compared to their peers now that we could look back 15 years.

And in six cases, clearly they did worse because of the leverage. In three cases it was mixed. One case I think the PE firm improved it.

I took, to the best that I could, a real look at what private equity firms have been saying for decades, that "we make companies stronger and more innovative." How does that square with the fact that they buy companies, usually healthy companies, by putting them in deep debt. I found that typically the companies get hurt quite a bit. Private equity firms own companies employing one out of every ten Americans. Quietly, they have a huge impact on our economy. And certainly if either Sanders or Warren become the Democratic nominee, they both have private equity right in their sights. So I still think it's very topical, private equity still has a huge impact, and I'm certainly proud of the book.

I saw the book and I was like, "Wow, what a super relevant idea." And then I saw that it was ten years ago, and I was like, "gosh that is so prescient."

Maybe it's a little too prescient. I should have waited a few years later. I think I was a little too soon.

You were ahead of your time.

Josh can be found at the Post and his book is The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy.

If you have anything you’d like to see in this Sunday special, shoot me an email. Comment below! Thanks for reading, and thanks so much for supporting Numlock.

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Send links to me on Twitter at @WaltHickey or email me with numbers, tips, or feedback at walt@numlock.news.

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