Business model of Rocket Internet

Business model of Rocket Internet

One of the largest technology companies in Europe is one that many people may not have heard of. Rocket Internet is the name of a Germany-based parent company of over 100 businesses with catchy names, including Jabong, Wimdu, and Lazada.

Rocket Internet is the creator of the so-called clones. The company specializes in copying a business model from a successful American e-commerce company, reworking it, and then launching it in other countries quickly and efficiently. In this way, Rocket “reduces market risk by adapting or importing a model that works in one part of the world” and porting it to another part of the world with adjustments that suit local markets.

Rocket Internet is responsible for information technology, design, marketing, and search engine optimization, which are managed from their headquarters in Berlin, while the founders of new startups take care of everything else. A whopping 25% of European unicorns valued at over $1 billion are Rocket Internet companies. Most recently, HelloFresh, which delivers ingredients to make pre-planned meals, received a new round of funding, raising its valuation to $2.94 billion from $680 million. HelloFresh is one of the few of their companies that operates in the US. Although all the IT and website development is done from Germany, they have adapted the recipes to American tastes. Additionally, in other countries, HelloFresh does not allow customers to choose the meals they receive in a package, while in the US, customers are allowed to do so.”

Rocket Internet is not a baby unicorn

Rocket Internet launched in 2007 and now operates in 110 countries, with a particular focus on underserved or undeveloped markets in Latin America, Southeast Asia, India, China, Africa, and the Middle East. Rocket Internet currently employs more than 30,000 people worldwide, focused on four main sectors: food and groceries, fashion, miscellaneous goods, and home goods. 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 to $80.8 million 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 clone companies for more than 15 years. They are known for cloning companies like eBay, Airbnb, Facebook, Pinterest, eHarmony, and Groupon.

In 1999, the Samwer brothers started their first company in Germany, an eBay clone called Alando. What is the background? The brothers lived in an apartment in Silicon Valley and interned at various technology companies. They repeatedly tried to contact eBay with the idea of expanding their business in their native Germany. After their offer was rejected, they returned to Europe and started the business on their own. Their first items for sale included their childhood toys - much to the dismay of their mother, who planned to save the toys for the grandchildren.

Within 100 days of launching their first clone company, the brothers sold their business back to the prototype, eBay, for $53 million and became Germany's first internet millionaires.

Following this success, and less than two years after launching Groupon in Chicago in late 2008, the brothers copied it by launching MyCityDeal in Berlin, which has become the top e-commerce site for daily deals in 13 European countries. Like eBay, Groupon decided to purchase the clone in May 2010 for 14% of Groupon's shares, worth $170 million, within a few months of launch.

We would call the Samwers brothers a "start-up factory." Their success lies in their execution, not in fresh ideas. "We are company builders, we are not innovators." "Someone else is the architect, and we are the builders," Oliver Samwer explained in Wired magazine.

Is Rocket Internet a “Start-up Factory”?

Some have accused Rocket Internet of being a "Start-up Factory" that copies ideas that have worked in the US and replicates them in markets where prototype technology companies have not yet set foot. In fact, copying ideas for risky projects from abroad is not unique. It is more about recognizing opportunities or creative imitation, where there is an element of using existing solutions and adapting to local markets. When Starbucks CEO Howard Schultz visited Italy and saw the popularity of espresso bars, he was inspired to bring the concept to the United States. This process is an example of learning innovations by traveling the world and observing successful concepts in one country and implementing them in another. Rocket Internet is the largest and most successful company in this regard.

Wharton experts say companies like Rocket Internet don't have to worry about intellectual property or copyright infringement. According to them, it is quite difficult to prove the appropriation of a business model. You can't patent a business model or a method of how to do business - they are intermediaries between consumers and merchants. For example, Amazon One-Click may have some elements that are patentable, but defending them in court is “difficult.”

Small capital for founders

Rocket Internet's business model is very interesting because the founders have turned the incubator/accelerator idea, which is popular in the US, upside down. According to Bloomberg, while traditional incubators typically acquire a small percentage, within the range of 5% to 10%, of the equity of the companies they create, Rocket Internet selects startup founders and sends them to different countries around the world to launch businesses, offering them a similar share of the capital of the companies they found.

Rocket Internet always takes controlling stakes in its portfolio companies, giving capital to the founders, and not the other way around, as we said above, which is typical of traditional incubators or accelerators. Thus, founder entrepreneurs hold unusually small levels of equity in “their” companies (e.g., CEOs can expect around 5 to 10%). Furthermore, vesting schedules only provide this capital to founders over time and upon achieving explicit performance goals.

However, one striking similarity between Rocket Internet and incubators is the speed in deciding whether a business idea will succeed or fail. Rocket Internet aims to launch a company in 100 days, which is a similarly short timeframe for incubators and accelerators. The strategy is to quickly experiment with new ideas and refocus or close businesses that aren't working, based on the principles of discovery-driven planning (DPP) pioneered by Wharton management professor Ian MacMillan and the now-famous Lean Startup methodology.

It is remarkable how Rocket Internet implements a portfolio strategy that is fundamentally different from DPP. They are distinguished by the fact that they test-launch different products to determine their potential success in the future. Unlike others that rely on a single product. Rocket Internet's strength lies in their ability to develop multiple business ideas simultaneously and enter different markets at lightning speed.

Powerful incentives and work environment

Given that founders only own small stakes in their companies, the potential benefits of selling their equity do not directly match those of “classic” startups. Yet a small stake in a big pie can be more attractive than a big stake in a small pie if the company proves successful and the founders are attracted to Rocket Internet's experience and resources. In addition, founders also receive competitive salaries.

Success stories

One of Rocket Internet's most successful startups, Zalando, is an online shoe and clothing retailer that spun off independently from Rocket, although the Samwer brothers retained a 17% stake through their venture capital firm. Just 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. “There’s a lot more adaptation than copying,” says Netessine. “The founders of their startups in their respective countries have a large degree of autonomy to change the business model to adapt to local conditions. Zalando is a good example.”

Rocket Internet's global food delivery business is another hallmark of its success. The project is the biggest driver of the company's loan portfolio value increasing by 77% since it went public. It operates in 71 countries and includes companies like 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 are the largest online food delivery group, outside of China, in the world," Oliver Samwer told Reuters.

Other success stories include Jabong, a fashion retailer in India with a 135% year-on-year revenue increase in 2014, 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 startup Lamoda, is worth $3.4 billion and is ranked as the second most valuable European unicorn by CB Insights.

Fashion retailer Lamoda has created its own distribution and delivery network to reach 40% of the population since its launch in 2011. As Netessine explains, Rocket Internet “quickly realized that Russian Post was too unreliable and DHL/FedEx were too expensive and limited in their network services. This required a serious turnaround, which is why we don't like to call these companies copycats. They built a distribution network from scratch. While they have certainly succeeded in some aspects of logistics, we wouldn't compare it to being able to deliver letters to every single Siberian house, which is what the Russian Post is supposed to do. Lamoda only delivers to 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% annual revenue growth in 2014.

Regional leaders

Rocket Internet copies and adapts business models in regions around the world, often before American tech companies begin to enter foreign markets. The company has achieved impressive success in emerging markets, targeting the growing middle class and the growing popularity of the internet.

Being first to market allows them to quickly capture market share and establish the brand or product. The company was behind the first e-commerce portals in Myanmar, Nepal, Pakistan, Bangladesh, and Nigeria.

They are very talented at spotting emerging markets. For example, Nigeria caught their attention with its high internet penetration rate and market size, which was similar to France. For them, the fight for market share is key. The primary goal is to capture a significant market share, and then optimize costs. Their goal is to be the market leader and maintain that position. In this regard, one of their startups, Jumia - the "Amazon.com" of Nigeria, reported losses of 16% in 2014, according to The Economist.

Similar factories for startups

Similar incubators operate in the US, Europe and other countries such as South Korea and Russia. Calling themselves “startup factories,” “startup studios,” or “company builders,” these organizations are a bit different from Rocket Internet in that their approach is a bit more moderate.

We understand the complexity and specificity of the business model of Rocket Internet and other similar startup factories. If you wish to copy a successful business and integrate it into our global partner-entrepreneurial business ecosystem, we are ready to provide you with the necessary support and resources. Our expertise in this area can be crucial to the successful development of your business. If you are interested in how we can help you, do not hesitate to contact us for more information.