One of Europe’s biggest technology companies is one that many people might not have heard of in the United States. Rocket Internet is the name of a German-based parent company of over 100 businesses with catchy names including Jabong, Wimdu and Lazada.
Rocket Internet is the kingmaker of so-called clones. The company specializes in taking a business model from a successful American e-commerce company, rejigging it and then launching it in other countries quickly and efficiently. In doing so, it “pushes down market risk by tailoring or importing a model that works in one part of the world” and taking it to another part of the world with adjustments that speak to local markets, according to Wharton management professor David Hsu.
The Rocket Internet model centralizes information technology, design, marketing and search-engine optimization in the firm’s Berlin headquarters and then sends out start-up founders to launch a particular idea in a designated market or country. A whopping 25% of the European unicorns, valued over $1 billion, are Rocket Internet companies. Just recently, HelloFresh, which delivers ingredients to make pre-planned meals, received a new round of financing, driving its valuation up to $2.94 billion from $680 million. HelloFresh is one of the rare Rocket companies that operates in the U.S., and it may be a sign that more American consumers will hear a lot more about the company.
“They bundle up a bunch of resources to get started and give enough of a leash [for start-up founders] to make managerial decisions,” notes Hsu.
“It’s an interesting hybrid for new MBA graduates where you have more or less the security of a big company and you gain the start-up experience of Silicon Valley with resources as a backup,” adds Martin Ihrig, an adjunct professor of entrepreneurship at Wharton and practice professor at Penn’s Graduate School of Education.
Though the strategy sounds relatively simple, it’s actually an impressive feat to execute, says Wharton management professor Exequiel Hernandez.
“It’s very hard to take a business model and adapt it successfully to a divergent market. Even two places that are seemingly alike, such as Canada and the U.S., have profound differences,” he notes. “Rocket Internet seems to have developed a unique skill in taking existing business models and replicates them in a foreign market. Think about cultural, legal, geographic, economic, institutional and other ways in which countries differ. The trick is to know which ones matter for a specific business model and which ones don’t. Some models are very culturally sensitive — think fashion and dating — while others are extremely sensitive to legal issues, like Uber and Lyft.”
Rocket Internet’s business model “pushes down market risk.” –David Hsu
The HelloFresh news illustrates Rocket’s “very impressive growth,” says Hernandez. Hsu adds the semi-prepared food delivery business is a “hot area with high valuations for several of the players in the space right now.” Hernandez notes that at the start of 2014, HelloFresh only had 7% of the meal-delivery market share by revenue, and that jumped to 59% by the first quarter of 2014. In the same period, [U.S. rival] Blue Apron went from 73% to 28%. He adds, “Though all IT and website development is done from Germany, they have adapted recipes to American tastes. Also, in other countries, HelloFresh doesn’t allow customers to select the meals they get in a package, whereas in the U.S., customers are allowed to do this.”
No Baby Unicorn
Rocket Internet launched in 2007 and now operates in 110 countries with 30,000 employees. In October 2014, it went public on the Frankfurt Stock Exchange and was valued at $8.2 billion. In 2014, the company reported sales of $115.7 million, compared with $80.8 million in the previous year, according to The Economist.
However, the tech company is not a baby unicorn. The founders — brothers Oliver, Marc and Alexander Samwer — have been developing their chops for more than 15 years.
In 1999, the Samwer brothers launched their first company in Germany, an eBay clone called Alando. After living in a one-bedroom apartment in Silicon Valley and interning at various tech companies, the brothers repeatedly tried to contact eBay with their idea to branch out to their native Germany. With their proposal spurned, they moved back to Europe and launched the business on their own. Their first items for sale included their childhood toys — much to the dismay of their mother, who was planning on keeping the toys for grandchildren.
Within 100 days of launching their first clone, the brothers sold their business back to the prototype, eBay, for $53 million, and they became Germany’s first Internet millionaires.
However, they were not the first online marketplace in Germany, where shops are typically shut on Sundays. “When [Alando] started, there were at least 18 auctions sites in Germany — we weren’t the only ones. [The Samwers] were execution motors,” Niko Waesche, who was brought in to design Alando’s technology platform, said in an interview in Wired magazine.
Following that success, and less than two years after Groupon launched in Chicago in late 2008, the brothers launched MyCityDeal in Berlin, which became the top daily-deal e-commerce site in 13 European countries. Like eBay, Groupon decided to buy the clone in May 2010 for 14% of Groupon’s shares, worth $170 million, within a few months after launching.
The Samwers would call themselves “execution entrepreneurs.” Their success lies in their implementation, not in fresh ideas. “We are builders of companies, we are not innovators. Someone else is the architect and we are the builders,” Oliver Samwer explained in Wired magazine.
A ‘Start-up Factory’?
Some have accused Rocket Internet of being a “start-up factory” that copies ideas that have worked in the U.S. and replicates them in markets where the prototype tech companies haven’t yet ventured. Ihrig points out that “sourcing venture ideas from abroad isn’t unique. It’s more about opportunity recognition or creative imitation when there’s an element of using existing solutions and adapting to the [local] markets.” When Starbucks CEO Howard Schultz visited Italy and observed the popularity of espresso bars, he was inspired to bring the concept to the United States. It’s “knowledge acquisition, going around the world to see what’s working and bring it to another part of the world. Rocket Internet is the biggest and most successful with their business model,” Ihrig said.
“The devil is in the details, in the execution, and details are determined through experimentation, which is not visible to outsiders.” –Serguei Netessine
Wharton experts say companies such as Rocket Internet don’t need to worry about intellectual property infringement or copyrights. “It’s quite difficult to prove appropriation of a business model,” Hsu says. You can’t patent a business model or a method on how to do business — they are intermediaries between consumers and merchants. For example, Amazon One-Click might have some elements that are patentable, but enforcing that in court is “tricky,” explains Hsu.
Serguei Netessine, Wharton-INSEAD Alliance research director and an INSEAD global technology and innovation professor, notes, “What Rocket Internet copies or adapts are business models rather than products or technologies. Business models are the DNA of the company, closely intertwined with corporate culture. The devil is in the details, in the execution, and details are determined through experimentation, which is not visible to outsiders.”
Ihrig says the Rocket Internet model is also interesting because the founders have turned the incubator/accelerator idea, which has been popular in the U.S., on its head. While these incubators may take a small equity percentage of companies they seed, like 5% to 10%, Rocket Internet designates start-up founders and sends them to countries to launch a business, offering these go-getters a similar equity stake in the companies they’re starting, according to Bloomberg.
However, one striking resemblance between Rocket Internet and incubators is the swiftness in deciding whether a business idea will succeed or fail. Rocket Internet aims to get a company off the ground in 100 days, which is a similarly tight deadline within incubators and accelerators. Ihrig notes the strategy is to quickly experiment with new ideas and redirect or shut down businesses that don’t work, based on discovery-driven planning (DPP) principles pioneered by Wharton management professor Ian MacMillan and what is popularly referred to as the lean start-up method.
“It’s interesting that they have a portfolio approach that goes back to DPP. They are unique in that they try out various products to see if it has promise for the future. Others have just one product,” Ihrig notes. What’s unique about Rocket Internet is that it takes several business ideas at a time and moves to several markets at lightning speed.
It “gives a very high incentive to flesh out” a company, says Hsu. The downside is that there are some ideas that genuinely need time to develop, he adds. During demo days in the incubator or accelerator setting, entrepreneurs have to stand up and pitch their ideas, which really “accelerates their learning,” according to Hsu.
One of Rocket Internet’s most successful start-ups, Zalando, is an online shoe and clothing retailer that had spun off independently from Rocket, although the Samwer Brothers retained a 17% stake through their venture capital company. Just a couple of days before Rocket Internet went public in 2014, Zalando launched an IPO with a valuation of $5.9 billion. Originally launched in 2008 as a Zappos clone, selling only shoes, it expanded into clothing sales as well. “There is much more adaptation than copying,” Netessine says. “Founders for their start-ups in respective countries have a lot of autonomy to change the business model to adapt to local conditions. Zalando is a good example.”
One key to Zalando’s success was television advertising, which was not that common at the time for e-commerce, notes Gabriel Karlberg, who was once Marc Samwer’s assistant and is now a Ph.D. candidate at the Stockholm School of Economics. “[The Samwers] do a lot of analysis and work with a lot of numbers in their marketing efforts. It’s not just trial and error,” he says.
Adds Hernandez: “It would make sense to let go of a company … once it can stand on its own. Rocket Internet doesn’t seem to be wedded to any particular industry. The only commonality seems to be that it’s Internet or mobile based. The cash from the businesses they sell or spin off may help fund new projects with higher growth potential.”
Rocket Internet’s global food takeout delivery business is another hallmark of its success. The project has been the biggest driver in raising the company’s loan portfolio value up by 77% since it went public. It operates in 71 countries and includes companies such as FoodPanda and DeliveryHero. In fact, DeliveryHero is the third most valuable European company, worth $3.1 billion, with a network of over 200,000 restaurants, according to CB Insights. “We’re the largest online takeaway delivery group, outside China, in the world,” Oliver Samwer told Reuters.
Other success stories include Jabong, a fashion retailer in India with revenue increasing 135% in 2014 from the previous year, and Dafiti, a fashion retailer in five Latin American countries with 2.1 million active customers. Global Fashion Group, which includes Jabong, Dafiti and Russian start-up Lamoda, is worth $3.4 billion and ranked as the second most valuable European unicorn by CB Insights.
“I don’t think what Rocket Internet does is easy, so I don’t see it as being something that everyone should rush into.” –Exequiel Hernandez
Fashion retailer Lamoda established its own distribution and delivery network to reach 40% of the population after launching in 2011. As Netessine explains, Rocket Internet “quickly realized that the Russian Post is too unreliable and DHL/FedEx are too expensive and limited in their service networks. This required a major pivot, which is why I don’t like calling these companies copycats. They built a distribution network from the ground up. While they certainly succeeded in certain aspects of logistics, I would not compare it with the ability to deliver letters to every single Siberian house, which is what the Russian Post must do. Lamoda delivers only in relatively large cities, and the value of the parcel is quite large, unlike a letter.”
Another Rocket success is Home24, one of the largest furniture retailers in Europe. Valued at $1.03 billion, the business exploded with 70% in annual revenue growth in 2014.
However, Hsu warns, “Valuations remain sensitive to the possibility of bubble pricing, in which case whole sectors or types of start-ups are vulnerable.”
Regional First Movers
Rocket Internet strikes into regions often before American tech companies start making inroads to the foreign markets. The company has found impressive success in emerging markets by looking for a burgeoning middle class and Internet penetration.
“Being first to market allows them to quickly capture market share and establish the brand or product,” Hernandez says. The company was behind the first e-commerce portals in Myanmar, Nepal, Pakistan and Bangladesh.
“They’re very talented at spotting markets that are emerging. For example, Nigeria had a high penetration rate and the size of the market was similar to France. It’s all about market share for them. It’s important to get that market share and later on get a handle on the cost side. They want to be the dominant player and sustain it,” says Karlberg. To that end, one of its start-ups, Jumia, the Amazon.com of Nigeria, suffered losses of 16% in 2014, according to The Economist. However, some analysts don’t expect Rocket Internet to make a profit until 2017.
For Rocket, it seems like a “race to get into a particular market,” but that begs the question of whether it’s better to “quickly build out a big presence, or maybe it’s more clever for American companies to see what mistakes are being made and come in second,” notes Ihrig.
“I don’t think what Rocket Internet does is easy, so I don’t see it as being something that everyone should rush into,” Hernandez notes. However, Hsu thinks “they’re seeding in a purposeful way. Rocket Internet is flexible, nimble and getting things done.”
Originally appeared on Knowledge@Wharton, reprinted with permission.