The rocket effect

BY THE TIME OLIVER SAMWER HANGS UP HIS BOOTS IN, SAY, 20 YEARS, HE MAY BE the Internet economy’s most successful person—even if the most criticised. The Samwer brothers—Oliver is in the middle, between Marc and Alexander—have created the world’s largest e-commerce venture incubator, Rocket Internet. It has set up and funded what critics dismiss as dot-clones, or companies closely modelled on existing, successful dotcoms. Fans of innovation may mourn the loss of original ideas, but investors are cheering Rocket on.

Last month, Rocket raised $400 million (Rs 2,422.4 crore) from an investor syndicate led by Russian billionaire Leonard Blavatnik, Swedish investment firm Kinnevik, and J.P. Morgan. This is in addition to over $1 billion that Rocket raised in 2012, widely regarded as one of the toughest funding phases after the 2008 financial meltdown. Until May, the Samwers owned 75.8% of Rocket Internet, while Kinnevik owned the rest, according to a Goldman Sachs investment research report released in May. The latest round of $400 million could have changed this structure; the Samwers and Blavatnik were not available for comment.

In the investor community, Blavatnik is seen as a prudent businessman, who puts money in sectors he cares about. So, his investment in Rocket (and in Lamoda, a Russian fashion e-retailer, in June) is seen as an endorsement of the Internet economy.
For the Samwers, this infusion is further validation of the commercial success of Rocket’s strategy: speed and flawless execution. For Rocket, execution is key to creating scale; there are successful Rocket ventures across Latin America, West Asia, Africa, and South East Asia. The only place success has eluded it is China.

India is a vital part of Rocket’s strategy, if only because of the sheer size of the market. Oliver Samwer, considered Mr. Execution of the brothers, visits India at least twice a year. “He will stop in Delhi for 16 hours and meet each venture’s team, one by one,” says the co-founder of one of Rocket’s ventures in India who declined to be named. The dream, which Samwer verbalised in one of the rare interviews he gives, is to take on Amazon and China’s Alibaba. In a recent interview to the Financial Times, Samwer said: “There are three e-commerce companies in the world—Amazon, Alibaba, and us.”

To get the scale needed to take on the giants, Rocket needs India. Also, investors want exposure to emerging markets, and the India story is still compelling. “India is one of the fastest-growing Internet markets in the world,” says Heavent Malhotra, managing director, Rocket e-Services, Rocket’s Indian arm. “It isn’t the most mature market today, but the ecosystem is fast maturing with the right practices. That is the best time for any Internet venture to grow.”

ROCKET ENTERED THE Indian market pretty much like its name; it shot in and shot up. It has not been here long (18 months), so it’s a late entrant by all accounts; Flipkart and Myntra started in 2007, and there are e-retailers like Indiaplaza that have been around for nearly 15 years. Rocket’s ventures here include Jabong (fashion retail), Foodpanda (food delivery), OfficeYes (office supplies), FabFurnish (furniture), CupoNation (discount coupons), and Printvenue (customised printing). All these are leaders, or very close to the leaders, in their space. “We are like a Google or Facebook for online food ordering,” says Ralf Wenzel, global managing director of Foodpanda, which is present in 27 countries. To ensure that this happens across categories, Rocket, which is operationally involved in all the ventures it funds, pumps in both money and expertise.

India has also become a market where Rocket tests ventures before taking them to other countries. OfficeYes and Printvenue began B2B operations here. Their early success led to expansion in Brazil, Singapore, Indonesia, Malaysia, and Vietnam.

“Rocket comes into a market like a tonne of bricks,” says Krishnan Ganesh, a serial entrepreneur and strategic investor in startups, who has worked with a variety of VC investors and seed funds since 1999. “It is an outlier, with a unique model where it identifies and enters a domain, puts together a team of entrepreneurs, pumps in lots of money, grows aggressively, and beats everybody else to be a market leader with very fast execution and a disproportionate amount of money thrown in.” For sure, Rocket has instilled the fear factor in an e-commerce market where players are struggling for capital, and consumer sentiment lacks the exuberance of 2011.

Samwer is something of an icon in the European startup community. The first big Internet startups in Germany emerged in 1998, says Kai Thierhoff of Thierhoff Consulting in Cologne, Germany, which helps entrepreneurs and startups engage with investors in Europe. Thierhoff is closely associated with the founders of a company that Samwer interned at during his university days. That was just before Samwer visited the U.S., where he interviewed over 100 entrepreneurs as part of his university diploma thesis. The result was a book, America’s Most Successful Startups: Lessons for Entrepreneurs, written with fellow student, Max Finger.

In the introduction to the book, Samwer wrote: “...our field research and ultimately this book focusses exclusively on the specific hands-on lessons which will help to build a successful company, no matter what the environment looks like, no matter where you are in the world.”

He implemented those lessons in his first startup, Alando, founded with his brothers. Alando was an auction site closely modelled on eBay, which the Samwers sold to eBay in 1999. The brothers exited at a valuation of $50 million. They then set up Jamba, a phone ringtones service, which they sold to VeriSign for nearly $275 million in 2004. Before starting Rocket in 2007, the brothers had made exits of roughly $320 million.

“THEY SEED AGGRESIVELY—four or five ventures across categories—and very quickly take a call on whether it’s working or not,” says an investor of a VC fund in Bangalore, who did not want to be named. “What they lack in experience, they make up with speed. They shake up the market, and give competing ventures sleepless nights.” Adds Manmohan Agarwal, founder of Yebhi, a Jabong competitor: “They take time out of the equation, which I wish I could do. But I don’t have access to that kind of capital.”

Compare this with Amazon, which recently entered India. (It was already present in the space with Junglee.com, but it has only now entered the market as Amazon.in.) The company has the reputation of moving with deliberate haste. It has been in India since 2004, when it set up its development centre in Bangalore. Since then, it has followed events in e-commerce, waiting for the right time to move. Rocket ventures are never so ponderous; once a model is seen to work successfully for any company, Rocket wastes no time in imitating it and bettering it. “The Samwers see which country Amazon is not in, and decide to be extremely aggressive in those markets,” says Thierhoff.

A writer on popular tech blog ReadWrite, recently wrote: “One of the keys to the success of Rocket Internet ... has been identifying websites that have taken off in the U.S. but have yet to globalise and find a strong, international following.”

It took Jabong just one year to do what market leader Myntra did in three—woo and win customers, set up warehouses, and grow a thriving clothes and accessories business. Jabong currently gets 12,000 customers a day compared to Myntra’s 10,000. There are critics of this approach, of course. “You cannot build a company by throwing money at it,” says a Bangalore-based investor who works with an international VC fund, referring to Rocket’s recent $45 million investment in Jabong. But it’s not just capital that Rocket brings to the table; it brings the combined experience of 55 ventures in 58 countries.

Rocket has a central team to build businesses and technologies across global ventures. Once a month, there is a ‘global e-commerce call’ where 50 to 60 co-founders from around the world discuss set topics and ask and answer questions. “If there is a learning in one geography in my domain, it is immediately transferred to another market,” says Vaibhav Aggarwal, co-founder of FabFurnish.

“Every month, we get to see the performance of other ventures,” says Siddharth Nambiar, co-founder of OfficeYes. The shipping costs of OfficeFab in the Philippines is 6% of revenues. “So I can compare that with mine, call up the Philippines guy and ask how he did it,” says Nambiar. Recently, FabFurnish learned from Zalando how to manage Facebook ads and structure multiple accounts in such a way that the cost of directing traffic to the site is lowered.

It’s not just learning from sister companies; Rocket companies share the same software skeleton. The basic idea is this: there are many Rocket ventures in similar fields (for instance, Jabong, Zalora, The Iconic, Lamoda, and Zando are Rocket ventures in different countries, all in fashion retail). The software is developed in Germany, and the code given to local Rocket sites. Jabong’s coders went to Germany to be trained on the code, then customised that for India.

“If you think about how many engineers Flipkart has, say, 70 to 100, cut that into a fraction,” says Ashish Gupta, senior managing director of Helion Venture Partners, a VC fund with a strong product and Internet play in Silicon Valley and India. Amit Kohli, co-founder of Foodpanda India says its mobile app was readymade, and needed only a few tweaks.

This is one of the reasons Rocket is able to launch different ventures simultaneously in a new market. Or, indeed, launch one venture simultaneously in multiple markets.

There’s also Samwer’s hands-on hunt for the best heads for Rocket’s businesses. Apart from going after management talent at global consultancies and investment banks, he visits his alma mater, the WHU—Otto Beisheim School of Management near Koblenz, to attend an ideas conference. Thierhoff says young men and women there jostle to get his attention in the hope of getting the title of “co-founder” in a Rocket venture.

THERE ARE VC FIRMS that will provide as much money as Rocket, and there are some that will dispense good advice. But Rocket is different because it builds the companies it funds along with other investors, while retaining 100% operational control.

It’s difficult to pin down Rocket’s holding structure for its ventures. In some cases, there are holding companies that fund individual ventures. In others, the venture is a Rocket subsidiary. “We have holding entities by country. Then, each country may have multiple ventures. Each of these ventures has a different holding structure,” says a co-founder of a Rocket venture. The advantage is that a Rocket venture can raise capital locally from other investors, even though it may be part of a global network or a subsidiary of similar businesses in other countries.

Critics, however, say that this kills the spirit of enterprise. Gupta backs the entrepreneur-driven model against the cookie-cutter Rocket approach. “Entrepreneurs who get to Myntra’s place are fundamentally stronger businesses than a company built by virtue of hired hands. Mukesh [Bansal, Myntra’s founder] will figure how to change in line with business, but Jabong will have to rely on people who are not as vested.”

A former employee of Rocket India says this is not necessarily true; the people who head Rocket’s ventures are not “hired hands”; they are co-founders of the business and have skin in the game. “The ventures are completely different entities. Each venture would have its own path, and respective set of investors. Those are independent decisions,” adds Rocket India head Malhotra.

Saurabh Kochhar, co-founder of Printvenue, calls a Rocket stint a “crash course in entrepreneurship”. Sahil Shah, co-founder of CupoNation, says the kick is in being able to run your own company. “That is a big thing. We have to answer our investors, but we take control of the situation with thousands of challenges.”

The one demand made of all co-founders and managers is to grow rapidly and become the dominant player. Speed is imperative. “Whatever mistakes co-founders make, let them make. Make them fast, make them now. Let’s not make them in year three. Our risk-taking is highest in year one. But by year three, our ventures are pretty much solved for scale,” says Malhotra. It’s an echo of what Samwer reportedly tells co-founders: Get the job done fast and eliminate mistakes later.

This philosophy is core to Rocket ventures going online in three weeks. With Jabong, the plan was to increase choice for customers. Towards this end, it began with shoes and apparel, and added fashion jewellery within the first week, amassing around 100 brands across categories. When Myntra or Yebhi began reinventing three years ago, their focus was on shoes, before moving to apparel.

Critics and competitors claim that Jabong destroyed market dynamics in retail: credit terms, payment terms, margins. “They destroyed all of that shamelessly. We had created a 60- to 70-day credit cycle; they made it 30 days,” says Yebhi’s Agarwal. “Margins to vendors were lowered. It is hurting them today, but it expanded the market for them in their early days.”

Then there’s Foodpanda, which competes with JustEat and TastyKhana, which have been around since 2007. The older companies have taken five years to gain scale; JustEat’s stronghold is Bangalore, despite growing to 2,500 restaurants in six cities, while TastyKhana only recently moved out of Pune to Delhi NCR, Bangalore and Mumbai. In one year, Foodpanda breached the 2,100-restaurant mark across six cities. Competitors say Foodpanda waived sign-up fees, and cut commissions to single digits (against 12% to 15%).

Kohli defends his company, saying that sign-up fees would have made restaurateurs reluctant to go online, and low commissions were rare exceptions. “Our growth has been business-based and not by undercutting commissions,” he says.

INVESTORS, TOO, ARE learning from the Rocket book. Alok Mittal, managing director of Canaan Partners, a VC firm in Mumbai, at a recent meeting with journalists, spoke of the Rocket effect to illustrate how VCs have sharpened their outlook towards entrepreneurial ideas. Canaan has invested in online shopping portal Naaptol, and witnessed the Jabong-Myntra battle in 2012. “It showed us that in certain online categories like fashion, cash muscle can help a new player catch up,” says Mittal. Canaan has begun analysing ideas in categories where ecosystems are evolving, and which have a supply chain that can sustain the heat of battle.

While proponents of innovative thinking still deplore Rocket’s strategy (Wired magazine called it the Samwers’ “cloning factory”), it’s not such a disadvantage in India, where leading e-retailers model themselves on global leaders; Flipkart wants to be India’s Amazon, for instance.

There’s no disputing the fact that the Rocket model works; in June 2013, web metrics engine Alexa ranked Jabong at 620, Myntra at 695, and Yebhi at 1,581. This means Jabong has better online recall in its category. The Bangalore-based investor says: “Once you know what is to be done, you don’t need an entrepreneur. You need execution. You outspend the rest who are first to market to gather scale.”

It’s what American economist, Theodore Levitt, called the ‘Used Apple Policy’. “According to this policy, a company consciously and carefully adopts the practice of never pioneering a new product. It says, in effect, “You don’t have to get the first bite on the apple to make out. The second or third juicy bite is good enough. Just be careful not to get the tenth skimpy one.” Hence it lets others do the pioneering,” he wrote in the Harvard Business Review back in 1966, in an article on Innovative Imitation. And innovative, profitable, imitation is just what Rocket is doing.