Two years ago, Rocket Internet looked primed to go stratospheric. Europe’s e-commerce answer to Alibaba and Amazon had already created Germany’s eBay, sold off the Zalando fashion retailer and captured Asia’s online fast-food markets.
The proceeds from its €1.6 billion stock listing in October 2014 were to provide the next big boost. Since then Rocket’s successes have sputtered amid fears of a new Internet bubble, leaving the company scraping for its next big deal.
Rocket Internet began as an incubator for other online start-ups, accelerating the spread of e-commerce worldwide by replicating the online success of America’s internet giants. It’s also a cautionary tale about misjudging capricious financial markets and adjusting management practices in the progression from a small German start-up to a sprawling concern with 30,000 employees worldwide.
Oliver Samwer likes to say he makes three mistakes a day but also five good decisions.
Founded in 2007 by Oliver Samwer and his two brothers Marc and Alexander, the company has launched more than 100 Internet retail entities across 110 countries, making the trio billionaires.
Oliver Samwer, the CEO, likes to say he makes three mistakes a day but also five good decisions. He began his ascent to the top of Europe’s Internet pile in 1999 when he and his brothers started a German internet auction site at a time when Ebay had yet to fully enter the German market. They began by auctioning off some of their own possessions and the project took off, attracting the attention of the fast-expanding U.S. retailer. Within months, eBay bought the Samwers’ platform to become the nucleus of its own German-language eBay site.
Today, Rocket Internet is Europe’s biggest e-commerce company with a declared aim to launch online services that can reach three-quarters of the world’s mobile phones. Its business model focuses on “identifying and building proven Internet business models for new markets.”
“Proven” here means the start-up emerging from Rocket Internet’s stable are essentially copies of established sites like Airbnb, eHarmony, Pinterest and others. The practice has earned the company a reputation as the clone factory of the global Internet. For a while within the industry, Berlin had the dubious cachet of being the Internet’s China, a place where others’ products were copied without asking. Rocket Internet defends the practice, seeing its role as start-up builders for untapped markets and not an architect of new business models.
Ahead of the company’s 2014 IPO, the future looked bright. Rocket had just come off the 2013 sale of the hugely popular Zalando online clothing store, patterned after the U.S. online fashion retailer Zappos. When Zalando went public a year later, it raised €605 million. Since then its shares have risen by nearly 30 percent, valuing Zalando at €6.9 billion.
By contrast, Rocket Internet’s own stock price fell 50 percent over the same period, slashing its market cap to €3.5 billion from €6.7 billion at its October 2014 launch. For scale, Amazon and Alibaba have market caps of $252 billion and $163 billion, respectively.
Last year Rocket Internet’s momentum stalled as big investments continued to post losses. In December, the group reported an operating loss of €629 million at its biggest startup investments in the first nine months of 2015, despite revenues more than doubling.
The one initial public offering planned last year, the group’s HelloFresh online grocery service, was postponed indefinitely, reportedly because Rocket Internet saw the market as too soft. HelloFresh is working to burnish its image by signing British celebrity health food chef Jamie Oliver to add his recipes to the site’s menu. Also rooted to the launch pad are online start-ups like furniture store Home24 and the fast-food platform Delivery Hero. In February, Rocket Internet gave up on its meal delivery services in Italy, Spain, Mexico and Brazil, selling its subsidiaries there to U.K. rival JustEat for €125 million.
The setbacks have shaken faith that the start-up’s sharp revenue growth is attractive to investors even if the company still hasn’t proven it can ever make a profit. The same question hangs over many big-name Internet start-ups these days, spurring talk of another bubble in Internet stocks. “The days when pure growth provided for euphoria are over,” said Andreas Feiden, owner of consultancy Finnovativ. “Quality and getting into the black play a much bigger role with investors now.”
Oliver Samwer took on his critics in a Handelsblatt interview, arguing that it’s no surprise that Internet companies take up to nine years to turn a profit. “We’re not going to let them drive us crazy, even if some media have accused us of pretty much everything you can imagine in the recent past,” Samwer said. “We believe in the course we’re taking and will continue with it.”
The company’s fledgling platforms will begin turning the corner in 2016 with the next two years showing even more promise, Samwer insists, predicting that a new IPO by one of Rocket’s many start-ups can be expected this year. Nor does the company face any liquidity problems. It still has € 1.7 billion in cash and has just launched a new $420 million fund for new projects, the largest Internet investment fund in Europe. Samwer also isn’t fazed by his company’s stricken share price. “I have experienced all the highs and lows; 50 percent up and 50 percent down,” he says.
Among Rocket Internet’s defenders is Christian Miele, a German venture capital investor who knows Mr. Samwer personally. “To survive in today’s global market, many firms using investors’ money post losses for several years before they become profitable,” Mr. Miele wrote in a contribution to Handelsblatt early this year. Meanwhile, he wrote, the company is serving as the flagship for European e-commerce and providing services in previously under-served markets, as well as generating thousands of jobs worldwide.
Still, there are growing outward signs of tension inside the company. A number of senior managers have already bailed. By the end of last year, the company had lost its deputy finance chief and its heads of human resources, technology and public relations. In December, the company lost its supervisory board chairman Lorenzo Grabau, who heads the Swedish venture capital firm Kinnevik. Rocket Internet explained at the time that Mr. Grabau’s replacement with a new board director had long been planned.
But the sudden string of departures and financial setbacks was enough to accelerate the sell-off in Rocket Internet’s shares. Insiders speak of uneasiness over how the company is run after the rapid growth spurt since its founding. The company, says one former employee who does not want to be named, is run “like a snack shack, founding one start-up after another,” forgetting it is no longer a start-up itself.
Some experts have questioned a surprise €600 million capital increase in early 2015. Coming only a few months after Rocket Internet’s IPO, it did little to warm investors’ hearts. “Rocket has suffered a collapse of confidence on the capital market,” a person familiar with the company says. Analysts also complain of having trouble with the company’s opaque structure and limited financial data, making it difficult to assess the company’s value. Rocket Internet is a so-called “light listing” on the Frankfurt stock exchange, which means it does not have to provide the same kind of financial information to investors as regular listed companies.
At an investors’ meeting in December, Mr. Samwer and his chief financial officer Peter Kimpel sought to allay these concerns, saying that any future cash calls are far off, and that three of its companies would break even by the fourth quarter of 2017. The market wasn’t impressed and Rocket Internet’s stock closed the day with another 3-percent drop.
As markets wait to see if Rocket Internet can snap out of its string of bad luck, analysts say the company could help bolster confidence by converting to a full stock-market listing that requires a higher standard of financial disclosure. Until then, investors will have to take Oliver Samwer’s word that all systems are go at Rocket.
Terence Roth is a business journalist based in London. Handelsblatt’s Christof Kerkmann, Katharina Schneider and Thomas Tuma also contributed to this article.