Oliver Samwer is unapologetic about his approach. “I’m not here to make friends,” he told a consumer goods forum in Paris in mid-June. “Retail stores are a relic from the time of Christ’s birth.” They only exist, he added “because there was no Internet at the time – but that doesn’t mean they have a right to exist.”
Oliver Samwer left his audience with one message: “You should leave this room very paranoid.”
The empire of Rocket Internet, the venture capital firm founded by the Samwer brothers Oliver, Alexander and Marc in Berlin, stretches across the globe, wherever they they see an opportunity to make money. They were early investors in Facebook, LinkedIn and Groupon, created Europe’s largest online clothing retailer in Zalando, and have rolled out countless other e-commerce start-up hopefuls around the world.
The stratospheric rise of the Samwer brothers is unmatched in recent years. Now the three brothers are planning to bring Rocket Internet and Zalando to the stock market. The two companies are together valued at nearly €8 billion ($10.5 billion) and the brothers’ shares are expected to be valued at a total of nearly €3 billion.
An initial public offering could come to fruition as early as autumn. Before Rocket Internet goes public, the company will be converted from a German to a European listed firm, according to sources, and then be listed on the Frankfurt stock exchange.
An Opaque Maze Of Business Interests
Nobody has been more successful, nor has any company been more controversial on the European Internet start-up scene. Yet an investigation conducted by Wirtschaftswoche and German public television station ZDF found the Samwer brothers’ business methods straddle the gray area between cunning and cleverness on the one hand and immorality on the other.
Rocket Internet is an opaque maze of businesses spread out across five continents, troubled by conflicts of interest and the oversized influence of its largest shareholders. Above all, the venture capital firm is placing a massive bet on the future of online retail.
And it still has to prove the companies it has founded can actually make a profit. A review of 10 Rocket Internet-founded firms revealed a combined operating loss of €431 million in 2013.
“The whole thing is one giant black box.”
Compared to its parent company, Zalando looks like a bastion of stability and transparency. The company has surged to become Europe’s largest online clothing retailer within just a few years, albeit with the help of €42 million in subsidies from German states and the federal government for setting up shop in structurally weak regions of the country.
How the entire Rocket Internet business is doing is anyone’s guess. All in all, the holding company is comprised of 1,500 individual online stores, some with headquarters in well-known tax havens such as Luxemburg and the U.S. state of Delaware.
“The whole thing is one giant black box,” said Jörg Funder, professor of retail management at the Hochschule Worms, noting some firms in the group don’t even report annual results.
Turning Berlin Into Europe’s Start-Up Capital
The Samwer brothers’ dotcom story began in Berlin, now at the heart of Europe’s start-up industry in large part thanks to the success of Rocket Internet. In 1999, the brothers launched a site called Alando as a German rival to the auction site eBay.
The three brothers quickly divided up the workload: Oliver Samwer became the leader, Alexander the strategist and Marc the diplomat. They initially used their own private stock when activity on the site was down, selling off furniture, baseball gloves and model trains to kick-start auctioning on their new site.
Financing was also a problem at the beginning: “We did have to play some tricks,” Oliver Samwer admitted later. “We told the venture capital firms the technology was as good as installed, while convincing the technology firms that the financing was as good as secured.”
Their gamble worked. A few months later they sold Alando to eBay, making the brothers millionaires in the process. And thus was born a broader business concept – the systematic copying, rolling out and resale of proven online ventures.
With the creation of Rocket Internet in 2007, the brothers began to industrialize the process. Wherever in the world a new online trend was born, they churned out a competitor for the German market, such as the dating site eDarling, cosmetics retailer Glossybox, furniture retailer Home24 and home-rental site Wimdu, as well as the online credit exchange firm Lendico.
The Samwer brothers’ incubation process has drawn the ire of many in the tech world. Yet their business model seems to come right out of the book of Germany’s famed “Mittelstand,” the country’s bedrock of small and medium-sized firms that have grown to dominate the world of manufacturing. But instead of producing goods, Rocket Internet churns out start-ups for the digital age.
Conflict of Interest? Samwer Brothers Operate Outside Rocket Internet
The company’s structure doesn’t get any less complicated when it comes to the Samwer brothers themselves. Unlike most chief executives, Oliver Samwer has no clause in his contract preventing him from working simultaneously for a competitor. This has allowed him to lead the European Founders Fund, recently re-christened Global Founders.
The Munich-based fund is a private venture of the Samwer brothers, in which they have bundled their stakes in Rocket Internet and Zalando. The problem is that Global Founders mission is to invest in young companies, sometimes in the same field in which Rocket Internet is already active.
The involvement begs the question: What will Oliver Samwer do if he discovers the next big thing in the world of online retail? Will he copy its business model in the interests of his Rocket Internet shareholders, or invest on behalf of his brothers via Global Founders instead?
“Retail stores are a relic from the time of Christ’s birth. They only exist because there was no Internet at the time.”
This is not just a hypothetical discussion. Rocket’s investor base has been growing. Online-service firm United Internet announced in mid-August that it had bought a 10.7 percent stake in Rocket Internet, offering a bit of accounting trickery in the process.
On paper, United Internet should have paid €435 million for the shares. But instead of paying the full amount in cash, the company gave Rocket Internet stakes, valued at €102 million, in several start-up firms from another fund – one run jointly by United Internet and Global Founders.
The problem is that United Internet originally valued this portion of the deal at €30 million. A spokesman for United Internet explained the sudden explosion in profits to €102 million as a later “revaluation” of the shares – one from which the Samwer brothers themselves profited by swapping their jointly-held Global Founders-United Internet shares for additional stakes in Rocket Internet.
Playing Dirty With Competitors
Rocket Internet has also faced accusations of playing dirty – Wimdu is a prime example. The portal, modeled on U.S. website Airbnb, allows people to rent out their homes to travelers. Airbnb in an email to business partners warned of the “attack of the clones,” even accusing Wimdu of pretending to work on behalf of Airbnb to lure away customers. Wimdu would not comment on the allegations.
Rocket Internet has been known for its aggressive tactics in emerging markets as well. In Africa, for instance, it established online retailer Jumia as the chief competitor for Nigerian firm Konga. Only Rocket Internet went a step further, buying the rights to the Konga web address in 11 other African countries. “We plan to launch a start-up in different African countries under this name,” said a Rocket Internet spokesman. The move prevents Konga from using its own name to expand into those countries.
“Anything and everything is subordinated to the corporate success of the Samwer machine,” said Joel Kaczmarek, editor of the Gründerszene magazine on start-ups and author of a recently launched book on the Samwer brothers.
And that success continues to attract investors either directly to Rocket Internet-founded start-ups or in the holding company itself. The list of investors includes the Indian steel magnate Lakshmi Mittal and the Russian-born U.S. billionaire Leonard Blavatnik.
Yet the most important financier is Swedish firm Kinnevik, which has pumped about €1.2 billion into the Samwer’s projects, mostly Zalando in which it holds a 36.5 percent stake and therefore leads the supervisory board. Kinnevik also has a 18.5 percent stake in Rocket Internet itself.
Seeking new opportunities, Rocket Internet has moved into emerging markets, this month announcing a partnership with Philippine Long Distance Telephone to offer cellphone payment methods in developing countries.
Together with the investment of United Internet, these deals have pushed the estimated market value of Rocket Internet to €4 billion, meaning the Samwer brothers would stand to make €2.2 billion should they cash in their 54 percent stake in the company. Their 17 percent stake in Zalando is worth another €660 million.
According to a July document filed to turn the firm into a stock-holding company, Rocket Internet’s owners received nearly €1 billion in dividend payments between 2012 and 2014.
The dividend payments have emptied the pockets of Rocket Internet, but new investors and soon the stock market should help replenish the coffers. The Samwer brothers’ storied rise continues.
This article first appeared in the weekly Wirtschaftswoche magazine. It was translated by Christopher Cermak of Handeslblatt Global Edition.