Casper's shrunken IPO will test markets' appetite for unprofitable startups

Mattress retailer Casper Sleep Inc. cut the price range Wednesday for its initial public offering, shrinking its potential market value to well below the $1.1 billion valuation it hit in a private funding round less than a year ago. It's now aiming to sell shares for $12 to $13 each, down from the original range of $17 to $19.

Questions about how private valuations for buzzy startups translate into public trading dogged 2019's marquee listings, with the two most prominent debuts -- Uber Technologies Inc. and Lyft Inc. -- still trading well below their initial public offering prices. Meanwhile, the spectacular collapse of WeWork reads like a cautionary tale for money-losing unicorns headed for public markets.

Speaking before Bloomberg reported that Casper was planning to slash its price range, the co-chair of law firm Cooley LLP's global capital markets practice group said he was expecting a more subdued pipeline of wannabe public companies in 2020, and a less tumultuous ride for investors.

"Last year, we saw some of the most interesting tech deals but not a great deal of stability in the post-market trading for other companies to want to emulate," said David Peinsipp. "This year, I expect to see more consistency and stability, which I think will be a good sign for the market."

Casper, which counts Target and the chief executive officer of Canada Goose Holdings among its backers, echoed IPO pitches of the past by focusing prospective investors' attention away from losses and onto its rapid revenue growth -- and the potential for more as it taps into the $432 billion "global sleep economy." That may have been enough to spook those who've been burned by similar promises.

"Investors continue to be very focused on companies with leadership position in big markets," said Greg Chamberlain, head of U.S. technology, media and telecommunications equity capital markets at JPMorgan Chase. "There's an increased focus on detailing the path of profitability."

Five weeks into the year, markets have so far been kind to debutantes, with all but one of the six U.S. listings that raised more than $100 million trading above their IPO price, despite anxiety about the spreading coronavirus roiling equities in recent days. Of course, not all of the candidates fit the mold of the loss-making unicorn pumped up by private money.

Reynolds Consumer Products Inc., the profitable maker of Reynolds Wrap aluminum foil and Hefty trash bags, last week raised $1.2 billion in the biggest U.S. IPO this year. Its shares closed Tuesday up almost 16% from their debut. That offering will likely be surpassed by PPD Inc., a biotechnology and pharmaceutical research services company -- also profitable -- that's seeking to raise $1.62 billion in its IPO set for Wednesday.

While Casper is taking the traditional route to tap public market investors, one trend market watchers are expecting is a flurry of companies considering direct listings instead of an IPO. The alternative route lets existing investors sell shares without being diluted, and without a lock-up period during which they can't cash out. Even companies that aren't likely to go public that way are asking about the process.

"We're certainly seeing the IPO process evolve," JPMorgan's Chamberlain said. "We'll likely see increased transparency in the process, including the manner of communicating with public market investors and method of price discovery."

Companies could also rush to market in the first half of the year to avoid coinciding with the U.S. presidential election in November. Listings often tend to trail off around the Thanksgiving holiday, but the effect could be particularly stark this year.

"Subject to the market's view on the impact of the 2020 election, IPOs are likely to be front loaded with the majority pricing before July or August," said Colin Stewart, global head of technology capital markets at Morgan Stanley.

Over 180 companies went public on U.S. exchanges last year, raising more than $51 billion combined, according to data compiled by Bloomberg. Here are some of the ones we're watching in 2020.

- Airbnb: While Airbnb Inc. isn't expected to pursue a traditional IPO, the 12-year-old home-rental company is still likely to be the most high-profile listing this year.The profitable company, last valued at $31 billion in a 2017 private funding round, is planning a direct listing where it won't raise new capital, people familiar with the matter have said. Airbnb Inc. previously said it plans to be publicly traded during 2020.

- Other direct listings: Investors expect one to four direct listings this year, compared to just one -- Slack Technologies Inc. -- last year, according to a survey conducted by Deutsche Bank. Work management platform Asana Inc. filed on Monday for a direct listing. Food-delivery service Doordash Inc. and software development and information-technology operations GitLab Inc. are also among firms considering the alternative method."Almost every company is asking about direct listing today," said Jackie Kelley, Americas IPO Leader at Ernst & Young.

Venture capital firms as well as Goldman Sachs and Morgan Stanley each held events last year to promote the listing option. The New York Stock Exchange and Nasdaq have submitted bids to the Securities and Exchange Commission to let companies raise primary capital during a direct listing.

- Food: If 2019 was the year of the ride-hailing IPO, 2020 could be the year that the food-delivery industry gets shaken up. The only U.S. listed player, Grubhub Inc., has denied reports that it is for sale while Postmates Inc. has been sitting on its confidential IPO filing since last February. Alongside Uber Eats and Doordash, betting on the winner is no easy task.

Olo, which powers the back-end software for some of these delivery services, reached out to potential advisers late last year for an IPO that could value it at about $1 billion, Bloomberg reported. The company, whose name is derived from "online ordering," counts Shake Shack Inc. founder Danny Meyer and Tiger Global Management among its investors.JAB Holding Co., meanwhile, is working with banks on the planned IPO of its coffee empire, which includes brands such as Caribou Coffee and Peet's, people with knowledge of the matter have said.

- Sports and fitness: Dallas, Texas-based Topgolf International Inc., an operator of golf-themed driving ranges, tapped Morgan Stanley, JPMorgan and Bank of America Corp. for an IPO that could raise about $1 billion, people familiar with the matter have said. The company, backed by Providence Equity Partners and Callaway Golf Co., is seeking a valuation of $4 billion. Group workout company F45 Training -- backed by actor Mark Wahlberg, and boutique fitness franchise owner Xponential Fitness LLC are both planning listings.

- Fashion: Debt-laden retailer J. Crew Group Inc.'s plan to spin off its denim unit Chinos Holdings Inc., branded as Madewell, could happen later this year. The deal would help the parent raise capital amid a heavy debt load, which stands at almost $2.5 billion.Premium shoe brand Cole Haan Inc., acquired in 2013 by private equity firm Apax Partners from Nike Inc., filed for an IPO confidentially in October.

- Cybersecurity: Santa Clara, California-based cybersecurity firm McAfee Inc. has hired Morgan Stanley and Bank of America Corp. as well as a full banking syndicate for an IPO, people familiar with the matter said last year. The listing would be return to public markets for McAfee, which was taken private by Intel Corp. in 2010 in a $7.7 billion buyout. Private equity firms TPG and Thoma Bravo later took stakes.

- Enterprise software: Software companies, including Zoom Video Communication Inc. and Datadog Inc., posted a post-IPO gain of 41% on a year-to-date weighted average basis, compared to an average of 20.8% across industries, according to data compiled by Bloomberg. The enthusiasm has encouraged a roster of similar companies to follow suit.

Procore Technologies Inc. is working with Goldman Sachs on a listing that could value the construction-management software maker at more than $4 billion, while JFrog Inc. has tapped Morgan Stanley and JPMorgan for an IPO. Jamf Software, which makes tools for enterprises to manage Apple Inc. devices, has filed confidentially and could be valued at about $3 billion in a listing.

"Some of the software companies that went public five years ago have matured, and investors are looking for the next wave of enterprise software companies and rewarding them with higher multiples," said Justin Smolkin, Deutsche Bank's head of technology, media and telecommunications equity capital markets.