What Do Europeans Think of Rocket Internet?

Talking about the Samwer brothers and Rocket Internet in the US will often lead to chuckles and mentions of ‘clones’ and ‘copycats’. A recent fundraise and indications of an IPO for the Samwer brother’s company-of-companies Rocket Internet has caused some to scratch their heads, questioning the validity of a >$5B valuation. The chuckles have continued, with a recent headline from a SF-based tech publication reading “Happy Friday actual entrepreneurs: Rocket Internet now even richer from ripping you off”.

Shrugging off Rocket Internet might not be a smart move, as the company has clearly demonstrated their ability to build large, successful internet-based companies – just this week, Rocket Internet company Zalando announced that’s it’s filing for an IPO, targeting $657M. Data from CB Insights shows that while Rocket Internet companies have typically raised less money overall (potentially due to the fact that they’re younger), those companies go on to raise larger amounts of funding than their U.S. comps in comparable rounds:

That said, the sheer amount of funding that Rocket Internet companies have raised is astonishing – CB Insights shows this to be over $2.2B in the last 24 months alone:

It appears that their strategy is working – but what is it that makes Rocket Internet special? What can American entrepreneurs and VCs learn from the Samwer Brothers? Several smart European-based VCs and Founders from the Quibb network shared their opinions, thoughts on the strengths of Rocket, and even expressed some doubts on their long-term potential.

Marcin Szelag (Partner at Innovation Nest, based in Kraków)

The Samwer Brothers and their Rocket Internet enterprise have definitely staked a claim in the land of the Internet. You can hate them or love them – but you cannot ignore their scale. Their Internet Empire is a streak of very successful ventures going back to as late as the 90’s. By some people they are considered as “copycats” to me they are the manifestation of an ideal executor. A global organisation which has crafted to perfection the process of finding emerging business models (mostly in the US) and executing them at massive scale (several geographies at a time) in the shortest possible time. Amidst the IPO rumours and an estimated $5.4 billion valuation, I think it is safe to say that their business model has been validated.

This “execution at scale” model is probably the most important lesson Americans can learn from the Samwer Brothers. They have created a completely new business model around the concept of building global tech companies. The US has its Silicon Valley with top tier VCs, Ycombinator, Angel.co – all with the aim of funding The Next Big Thing. In response – the Samwer Brothers have built an organisation which can take any Silicon Valley (US) validated business model and execute it globally. Typical venture backed startups take really long to grow to massive scale. Mostly because of the time it takes to validate a repeatable and scalable business model. Rocket Internet by going after business models which are already validated has shifted its focus to building an execution framework.

This framework, encompassing all the crucial areas in which most startups struggle – technology, user acquisition, operations, hiring, logistics, finance allows Samwer Brothers to focus on one thing, and one thing only that is becoming the dominant player in each local market. I think that in this aspect, The Brothers are in a class of their own. If we take any US ecommerce company, it probably moves a lot slower than its Rocket Internet “copycat”.

Raghav Gupta (Chief Commercial Officer at Videoplaza, based in London) 

Rocket Internet is the source of a lot of snigger and snark in tech circles since they clone successful models and adapt them to local markets. And yet, their numbers and recent financing show they’ve created billions of $ of value from what they’ve done. What can American learn from their success?

1. Business model innovation is still innovation. Yes, they shamelessly clone other people’s ideas and then ruthlessly execute them in their local markets but that is an absolutely viable and, it must be said, elegant business model. Having a model to replicate businesses in local markets isn’t easy and they’ve cracked the code. Theirs will be a great case taught in business school if it’s not already being done.

2. The size of RoW. That’s Rest of World for us Yanks. 😉 American startups are rightly focused on the huge domestic market. The playbook is often to go to the UK and then Western Europe before going to other markets. Rocket Internet, on the other hand, have shown the ability to build significant businesses in ‘RoW’ markets – India, Turkey, South Africa, Latin America.

3. Given both of the above, while it’s natural for American consumer-facing startups to focus on the huge domestic market, they risk leaving real money on the table by not globalizing earlier. That may well be the price to pay but be prepared to slog it out with a tenacious local competitor as some companies are doing or else buy them out. Either way, be prepared…

Hussein Kanji (Partner at Hoxton Ventures, based in London)

1. Oliver is a rock star. He works night and day, travels frequently, and deserves a ton of credit for building Rocket into the machine it is.

2. I am skeptical of the long-term viability of Rocket. Like all arbitrageurs, Rocket has a finite window. I think it’s mostly gone. The US companies have woken up to global expansion and have incorporated the Rocket playbook. Just like Jamba, which sold consumers with ringtones (which were overpriced subscriptions in disguise) the business went from developed world to developing world to poof. You can only exploit a model for so long. I think Rocket is laying down the foundation in a lot of frontier markets, but like investing in Webvan and Kozmo in 1999, the real returns come 10-15 years later.

3. I think one thing Rocket has mastered is taking a bunch of smart, hard-working, external validation (read: insecure) Ivy League (or equivalent) graduates and put them in the work version of an abusive relationship. It’s what banks (and consulting firms) mastered with analyst programs, and the big law firms mastered with their associate pools. These guys’ need for pedigree and affiliation with a known brand overshadow a poor work culture. Most burn out but not before Rocket has taken its pound of flesh from their lives. The good news is Rocket unintentionally turned into a bit of an academy; the same way McKinsey feeds corporate America and the big banks feed the private equity and finance professions. There are lots of ex-Rocket people that can be hired to help startups scale globally.

Clement Vouillon (Doer in residence at eFounders, based in Paris/Bonn)

I think that the biggest misconceptions about Rocket Internet comes from the fact that they are a “company builder” type of business (a still misunderstood model for internet startups) and that they are the first one who have reached this scale.

The way a company is built is heavily influenced by local factors and culture. Startup studios (= company builders) don’t differ. They even make it more obvious through their startup portfolio since they “multiply” this effect.

Access to capital, type of management, vision, international development, local culture, etc. can greatly differ from one country to the other and I believe that it partly explains the way Rocket Internet evolved. Coming from Europe their access to capital, access to early adopters and addressable market were much more limited than in the US. This is why it made much more sense for them to start with copycats of US companies which had a clear business model with identified customers (they didn’t copy Facebook, Twitter or Instagram for instance).

Once they had proven to be successful through their first exits (like CityDeal to Groupon) and once US fast growing startups understood that if they didn’t expand to Europe faster they would have to buy RI clones every time, the game changed. RI had to change gears and apply their playbook to emerging countries where the competition was less ferocious and the growth promising (pure growth since the markets are currently being built there).

In a sense RI is a very “German” company and this is why other startup studios from other countries (eFounders in France, Betaworks in the US, Makeshift in the UK) – even if they have the same “model” (they build products / companies) – are completely different. RI is the first one to have reached this scale. And the future big startup studios coming from the US probably won’t look like RI simply because you are not playing with the same cards in hand.

Nathan Benaich (Investor at Playfair Capital, based in London)

As an early stage investor based in London, the Samwer brother’s Rocket Internet is unquestionably a fixture of the broader European technology ecosystem in which I operate. Whether one considers its reputation to be a positive or negative one, it’s clear that Rocket is known for its ruthless focus on executing and scaling e-commerce businesses. Many belittle their process from a qualitative standpoint, claiming that it lacks inspiration because it obviates the famed entrepreneur’s ideation process and that it is implemented without concern for competitive ethics. My view is that we should instead focus on what the Samwer brothers set out to achieve, their results, and what we can learn from their experiments.

Investors and operators tout the importance of the team behind an idea, and their competencies across technology, marketing/growth, finance/operations, experience in the space, and a drive to never give up. These variables are all inputs into an equation that computes a team’s ability to execute on their idea to beat their competition. Execution is the Samwer brothers’ core competency. They have distilled and evolved entrepreneurship from an art to a science using an iterative, data-driven approach to decision making. Moreover, they impose strict short-term performance milestones on their new businesses (much like a Stop-Loss order when trading financial markets), failing which they cease operations. Driven by this ethos and a war chest of billions backed by Kinnevik and others, Rocket have launched 75 companies in 50 countries, collectively generating >$3bn in annual revenue. I believe the Rocket approach brings needed refocusing upon the core task at hand: building market-leading, profitable businesses.

Rocket’s impending IPO will be a success. While investors pursue the reinvigorated equity markets, commodities aren’t offering opportunities for returns (major funds and trading desks have closed) and interest rates on government bonds appear to be stabilising to low levels. As such, money managers and enterprises with significant cash on their balance sheets are looking into the private technology company market to generate returns for shareholders. Given that market and geographical diversification is a central tenant in portfolio theory, acquiring shares in Rocket if it were to go public would provide exposure to its activities around the world. Instead of working against Rocket to find your own opportunities and develop them into leaders in emerging markets, you could buy shares in Rocket.

What’s next on Rocket’s path to emerging market domination? The majority of their successful businesses are B2C (Zalora, Lazada). In emerging markets, B2C adoption occurs before B2B. Thus, the next step is likely rolling out B2B companies. Being flush with cash from an IPO will certainly help in this regard.