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Today we bring you an interesting slice from the world of internet startups. Let’s start with a question – What is common between Jabong and Foodpanda?
- Both started in 2012.
- Both were hugely popular.
Jabong and Myntra recorded identical revenues in 2014, ~$73million each , competing in the online fashion marketplace market. Foodpanda on the other hand grew on the back of deep discounting against Swiggy, Zomato and TinyOwl (at the time).
- And surprisingly both faded away at similar times.
In early 2016, Jabong was acquired & merged into Myntra (Flipkart) for just $70 million all cash-deal. This was just 2 years after Flipkart had acquired Myntra for over $330 million in 2014, the same year both were equally matched.
A year later in 2017, Ola acquired Foodpanda India for $200 Mn in stock. About 18 months into it, Ola shut down the business, succumbing to the cash-burn by rivals (Sw/Zo) alongside battling Uber in its core business.
If you think that’s all that is common, you’re wrong.
Both Foodpanda and Jabong were products of Rocket Internet, as were Printvenue and FabFashion.
Rocket Internet is a German startup-incubator or the “copycat” startup founders as they are more popularly known. Rocket Internet is a giant in its own right. At its peak, Rocket was valued at $8Bn in 2014, and was the largest European Tech company to go public.
But by mid-2020 after the pandemic hit, Rocket’s valuation dipped to $3Bn which is a beating when you are sitting over $2Bn in cash, marking the dim outlook for its future shared by its investors.
The last decade has not been kind and we’ll go into why. Let’s first understand how Rocket Internet shot for the moon.
🚀 Ride to the Top
“There are lots of ideas. The hard part is really executing on the ideas…Do not treat your idea like it is a gift from god, actually chances are that it is stupid.”
Oliver Samwer
These are the principles written by Oliver Samwer in America’s Most Successful Startups, his thesis on the US startup innovation story way back in September 1998. It largely emphasizes –
- Largely untapped / less competitive markets
- Aggressive marketing and product development
- Changing management teams with different phases of growth
- Ideas are only 10%, Execution is the rest
Rocket Internet was founded in 2007, by the Samwer brothers (Oliver, Marc and Alexander), but they tasted success on the back of their beliefs much earlier.
In 1999, 8 years earlier, Samwer brothers took notice of eBay in the US, and after being denied by eBay the opportunity to launch it in Germany, created Alando an “eBay for Germany”. Like for like.
Alando took off on a rocketship, and within 100 days was acquired by eBay for $43Mn. The first taste of success was there. This established the blueprint for many more to come – Monitor the US markets, and introduce the ideas in new geographies.
Copy, adapt to the market, hire (founders), overtake, sell.
In 2000, the Samwer brothers created a mobile-phone ringtone company, Jamba, that they sold to Verisign for $273 million.
You see, innovation doesn’t only happen at the idea or conceptual level, but also at an operational level. The Samwers had a strong belief that with their operational expertise, they could out-execute any competition given they were early into any market. They would hire founders and set them up with a slew of results to achieve and targets to meet while backing them with huge sums of capital.
As Rocket Internet, their first startup was Zalando in 2009 – a copy of Zappos (US online fashion retailer) – which turned out to be a massive success. It was valued publicly at over $100Bn in 2021 before tumbling to $7.9Bn today. The Samwers still hold stakes in Zalando.
DeliveryHero, started in 2011, IPO’ed at a $4.7Bn valuation, and is today a $10.5Bn company operating in 70+ countries, most as a market leader or competitive 2nd. It is also close to achieving profitability on a group level.
Rocket Internet also invested in other clones. They invested heavily in CityDeal and helped them scale quickly to 16 countries in just five months. At this point Groupon had no choice but to acquire them for $100 million.
Backed by the success, Rocket has incubated over a 100 companies over the last 15 years imitating the likes of Airbnb (Wimdu), Uber(EasyTaxi), Pinterest (Pinspire), to even Square (Payleven) and Stripe(Paymill). There is nothing it has not tried
But as a general sense, once they successfully replicated an idea in 1 new market, they would take it to the world and change their focus to building for the long term instead of getting acquired. Backed by success in e-commerce, they launched Lazada in 2012 as the ‘Amazon of Southeast Asia’, Jumia as the ‘Amazon of Africa’, and Linio as the ‘Amazon of Latin America’.
Today, Lazada is one of the more successful e-commerce players in most SEA markets. Rocket sold all its stake to Alibaba in 2017 at a valuation of $3 billion in just 5 years.
The Internet was a global catalyst and didn’t need much more doing in terms of conceptualization. Rocket Internet united the IT and back office operations of any startup incubated, much like how a House of Brands (Thrasio, Mensa brands) does today.
Since developing an original product experience was never their objective, Rocket made most of its fortune from the first wave of internet enabled startups – by building the Amazons, the Ubers, and the Doordash for the rest of the world that didn’t need much in product innovation.
📉 Down to the Earth
Over the last decade, Rocket has seen its valuation go down to $3Bn in 2020 from $8bn in 2014, before deciding to de-list from the market. Even as a few Rocket companies were outright successes, it struggled with the changed startup landscape.
Global venture capital funding went from $22Bn in 2015 to over $130Bn in 2021. And hence Rocket’s capital was less of an advantage against its rivals. VCs also preferred to take bets on founders who ran their own ship versus a Rocket incubated company. Rocket founders would usually hold single digit stakes in the company, while Rocket held majority stake and decided the targets for the founder to meet.
And with the internet startups maturing, it became increasingly easy to start an e-commerce business. Even Rocket’s operational playbook would gradually become outdated, as social media changed how customers discover products.
Why it never worked in India
A key contributor to Rocket’s success was introducing US business models in Europe. For similar markets, there are higher chances of success as PMF is almost guaranteed. This gave Rocket a free-run before other competitors emerged.
While they did achieve limited success in South East Asia, by the time Rocket entered India in 2012, India had its own wave of clone startups – Flipkart, Snapdeal, Ola and soon Swiggy, Zomato.
Rocket hired young consultants and professionals as founders to run their companies – Jabong, Foodpanda, and the likes.
It was Rocket’s capital + their founders versus home-grown talent with access to large venture capital [Read about the Indian startup funding through 2010-2021 here]
Simultaneously large sums of VC money started flowing into India as investors saw opportunity in the large market size. This meant Rocket never had the kind of free-run in India that it had in European markets.
Taking the Escalator this time
Rocket Internet has moved away from copying, staffing founders and scaling startups, and instead focuses on venture funding through Global Founders Capital, its VC arm founded in 2013.
In 2020, Rocket founders started Flash.vc, a pre-seed day 0 incubator claiming to develop “ideas” with founders.
Conspicuously, Flash bears no mention of Rocket in an attempt to distance itself from a bad reputation that Rocket has developed.
What Rocket did was not “wrong”, but just so out of ordinary that it seems wrong. Whatever may be, it put Germany on the startup map, and deployed billions into emerging markets before VCs even took notice.
“Let’s look at Lazada. To operate in Vietnam, Rocket had to not only offer a website, but create a method to receive payment in cash (long before Amazon offered this option), and build a national logistics network. Today, that same infrastructure is used to deliver all manner of goods to consumers.”
The Generalist
At its best, Rocket Internet brought entrepreneurship and opportunity to nascent startup ecosystems around the world. But it struggled with the pace of change in technology and venture capital. Its next chapter will reveal whether Rocket can recover the dynamism that once made it a pioneer – or whether its model belongs to a past era of startups. The startup factory is restarting its engines – but the road ahead remains long.