A Tale of Two Mattress Companies

December 29, 2016, 3:00 PM UTC

We live in an era that venerates venture capital. It can sometimes seem that a business is just a means to serve an investment fund rather than vice versa. What if—we’ll whisper this to avoid incurring the wrath of the Silicon Valley gods—it’s sometimes better not to take VC money? Is it possible that some companies could do better without it?

Casper and Saatva provide a revealing prism to examine that question. Both are young companies that sell mattresses to consumers over the Internet and allow customers to try them for several months and return them for a full refund. Both have succeeded, with Casper’s revenues vaulting to $200 million and Saatva’s to $168 million.

The two diverge from there. Casper is backed by $70 million in VC funding, along with celebrity investors such as Leonardo DiCaprio. The company has been spending like a lottery winner on a Vegas bender. There have been TV ads, podcast ads, a traveling “napmobile,” and an online publication dedicated to sleep. Casper’s promotional events have included a three-course steak dinner for 15 canine “influencers.” (Mock him if you will, but the Shiba Inu known as Menswear Dog has more Instagram followers than you and dresses better.) The occasion was the launch of Casper’s line of dog mattresses.

Casper dog beds on display at recent promotional event. Casper’s promotional events have included a three-course steak dinner for 15 canine “influencers.”Photo: Stefanie Keenan—Getty Images
Photo: Stefanie Keenan—Getty Images

All that spending has had another effect: There’s a solid chance you’ve heard of Casper. You’re less likely to recognize the name Saatva. Cofounder Ron Rudzin, a former retail executive, started the company in 2010 with $350,000 of his savings. Extravagant spending makes him nervous. That’s one reason Rudzin has rebuffed interest from investors. He put most of his $30 million marketing budget in 2016 into plain-vanilla Google ads.

Then there’s the matter of profits. Saatva claims it was in the black in its third month, which was crucial to its survival. For Casper, that doesn’t seem to be the point right now. (The company declined to address the issue.) Says James Newell of IVP, one of its VC funders: “Every­body has to make the tradeoff between growth and profitability … In Casper’s case it makes sense to invest dollars in building the brand, not just for generating sales in the near term, but over the longer haul to build a category-defining company.”

When asked about his rival, Rudzin sounds resigned. He’s used to the question. “Casper is just about getting their name outside. I did it in reverse. I built a healthy infrastructure, a moneymaking infrastructure first.” The process took longer—Saat­va was founded four years before Casper—but he and his two cofounders own 100% of the business. That doesn’t mean his ambitions are small. “I want to be a $1 billion business,” Rudzin says.

Casper, too, has big dreams. “We actually consider ourselves more of a sleep company,” its chief executive, Philip Krim, said in a video interview with Fortune. That means Casper also sells pillows and sheets, and more extensions seem likely. (For its part, Saatva also plans to expand into sheets.)

Casper’s expansive vision is a big part of what attracted venture capitalist Tony Florence of New Enterprise Associates, an early funder. Florence says he knew he would invest the first time he met Krim.

Both Casper and Saatva may be positioned for success, partly because their category is enjoying a “gold rush,” says David Perry of trade publication Furniture Today. The online-sales portion of the mattress business is surging, from 5% of the $15 billion industry in 2012 to nearly 10% this year.

Still, for the vast majority of consumer goods startups, the VC model is an awkward fit—even harmful—argues Rory Eakin, cofounder of ­Circle­Up, an investment marketplace for early-stage consumer product and retail businesses. “It’s a very different industry [from tech],” he says. “What I’m anxious about is VC investors coming in without appreciating the dynamics.”

Saatva CEO Ron Rudzin.Photo: Bryan Anselm—Redux
Photo: Bryan Anselm—Redux

Unlike tech startups, which often try to define a new industry, most consumer newbies enter existing ones. “There’s not a huge benefit from being the first mover,” says Kevin Laws of AngelList, which matches startups with early-stage investors. Joining an established industry means greater chances of solid—but not outlandish—growth. Of the 200 companies that have raised funding on CircleUp, the median growth rate is about 100%. Not bad, but not the three or four times rate VCs aim for.

In the end, it appears, it’s a tradeoff. Is your business aiming to make money—or to disrupt an entire industry? If it’s the latter, you’ll definitely need VC millions. If not, you might do better with a few good bank loans and help from your friends.

A version of this article appears in the January 1, 2017 issue of Fortune with the headline “Soft Landings in Mattresses.”