Fund in the News: Rocket Internet

In a week that corporate-backed internet incubator Rocket Internet saw one of its companies secure $79m and its latest venture launch in only two months, it is an opportune time to examine its progress as it advances towards an initial public offering later this year.

Rocket was founded in Germany in 2007 by Alexander, Marc and Oliver Samwer, the three brothers who had jointly launched mobile content provider Jamba and e-commerce site Alando, both of which were acquired by larger companies. After forming venture capital firm European Founders Fund, the brothers launched Rocket with a precise business model.

The firm operates somewhere in the space between an incubator and a venture capital firm, building companies based on e-commerce business models pioneered elsewhere, which could then be adapted for European or Asian markets.

The approach was based partly on Alando, formed in 1999 as a Germany-based auction site similar to eBay, before being bought by the US-company for $43m only a few months later.

Backed by Sweden-based investment firm Kinnevik, which invested €35m ($48m) in 2009, Rocket launched a series of companies intended to extend ideas that had already proven successful in the US to European markets.

These include Ladenzeile, an online shopping portal that was sold to publishing house Axel Springer, TopTarif, a financial price comparison site acquired by Holtzbrinck Digital, and lifestyle e-commerce company Zalando, which reached a €1bn turnover within five years.

Rocket has since aimed to use Zalando’s business model as a template to be extended across the globe in territories such as Southern Africa (Zando), Russia and Kazakhstan (Lamoda) and Southeast Asia (Zalora).

Rocket’s most substantial success so far is CityDeal. A daily deals website seeded by Rocket and venture firms Holtzbrinck Ventures and E.ventures in early 2010 through a $5.6m investment, CityDeal was acquired by North American competitor Groupon in an all-share deal a few months later.

At the time of Groupon’s initial public offering in late 2011, Rocket’s 10.3% stake in the US-based company was worth roughly $1bn.

The other investor in Rocket besides Kinnevik and the Samwer Brothers through the European Founders Fund, is US-based conglomerate Access Industries, which invested $400m in July 2013 following a $130m investment in Rocket portfolio company Lamoda.

Rocket also allows corporate investors to co-invest in both individual portfolio companies and its two holding companies, Bigfoot I and Bigfoot II, each of which oversee several of its startups across the globe.

Regular partners for Rocket include retail corporates Tengelmann and Tesco, both companies having made substantial investments in several of its portfolio companies, as well as investment bank JP Morgan and Holtzbrinck Ventures.

Rocket’s success has come with some element of controversy, with some in venture capital deeming it a ‘clone factory’. However, Rocket spokesman Andreas Winiarksi argues that innovation is not based merely on ideas, but the building of a market for a new product in a particular territory.

“One side of innovation is to have an idea, but innovation without execution is worth nothing,” Winiarksi told Global Corporate Venturing.

“We are very open about the fact we [use] proven business models. I strongly believe in the market economy and an important part of the market economy is that there is competition. No one can really ask for a situation where you have one player, a monopoly.”

This idea feeds into Rocket’s current strategy. It concentrated initially on its home country and subsequently expanded into the rest of Europe but the firm is now looking further afield, particularly to emerging markets where it aims to get in ahead of larger and more established companies.

“We have a strong focus on emerging markets,” Winiarksi explained. “There are currently 75 startups in our portfolio covering over 100 countries around the globe and many of them are in emerging markets.”

Those markets include Southeast Asia, South America and Africa and Rocket is looking to develop online shopping companies alongside price comparison sites, classified listings sites and transport-finding apps. The markets in question are less saturated, many possess a rapidly growing middle class, and the lower income they generate can be balanced against lower costs.

“The level of income is not the same, which is fair enough, but you also don’t have to pay the same salaries, so all in all it is a very fine deal to go to emerging markets,” Winiarksi said. “The competition is sometimes strong as well but mostly you do not have the intense competition as when there is a lot of capital in a market.”

Recent media reports suggest Rocket will seek to go public over the next few months, which could provide it with the financial means to expand more quickly, though the company is not having any difficulties in that regard.

Latin America-focused online marketplace Linio raised $79m from Access Industries last week, and Winiarski stated that Rocket’s portfolio companies raised more than €2bn ($2.7bn) in venture capital worldwide last year. Its newest startup, mobile storage provider SpaceWays, is also its fastest launching property ever, with only eight weeks between conception and execution.

Perhaps the IPO rumours could result instead in the flotation of Bigfoot I or II, which would give impetus to the companies in each portfolio, though it would also necessitate the formation of closer links between them.

In many ways Rocket has been ahead of the game and, although accusations of it being a clone factory are generally apt, Winiarski is correct when he states that Rocket is helping to bring “the business models and the internet economy from the developed world to all countries”.

E-commerce market leaders have widespread competition in their home countries and it is unrealistic to expect those in other regions to politely stand by and wait for them to take control of every other market.

The business models will reach those territories eventually regardless. Rocket is funding the development of those markets right now, and established companies have the opportunity to hit the ground running in those markets by investing in its startups. Whether they do or not, Rocket appears to have found a strategy that will help it to grow in the future either way.