Some time this year, German media report, the country’s hottest tech firm will go public at an expected valuation of up to €3 billion. Its name: Rocket Internet. Never used it or even heard of it? That’s because Rocket is not a company with which consumers interact. Instead, its highly lucrative business model is to find successful internet ideas and launch them in other countries.
“Yes, they copy, but they copy in an assembly-line fashion and with an international perspective,” notes Alexander Nicolai, a professor of entrepreneurship at the University of Oldenburg who’s extensively studied Rocket. “That’s innovative.”
Nicolai intends this analysis as a compliment. Rocket, launched in 2007 by the three brothers Marc, Oliver and Alexander Samwer, creates a steady stream of similar models that echo the American concept.
This is how the process works: at its Berlin headquarters, Rocket – which bills itself as the world’s largest incubator – constantly tracks tech startups. If it considers a budding company promising, it launches a similar one in other countries. Latin Americans can use its Easytaxi smartphone app the same way other people use Uber, while Wimdu offers the same services as Airbnb. Payleven works like the credit card app Square, but is focused on the European market. Among the Samwers’ earlier ventures were Zalando – a site similar to Zappos that’s now Europe’s leading online fashion retailer – and MyVideo, which resembles YouTube.
Rocket supplies these firms, and its startups based on original ideas, with funding, staff, expertise and logistical support. Incubation-and-venture-capital on steroids, one might call it. To date, Rocket has launched over 100 companies with operations in more than 100 countries, and recently Oliver Samwer told a news agency that the company is aiming to triple its portfolio within the next five years.
Creating a company that resembles an existing one is not illegal. Indeed, after some time every successful business idea becomes a commodity. Still, Rocket’s business model has stirred up feelings among American creators. “If you go to work for the Samwer brothers, you sell your soul to the devil,” fumed Jason Calacanis, the serial -entrepreneur and angel investor, in 2012. Without specifically referring to Rocket, Alexis Ohanian, the tech personality and co-founder of reddit and hipmunk tells Newsweek that “software is by its nature easy to deploy and fast to scale. The same characteristics that let us create things without permission also let someone clone just as easily. Creating clones and selling them back to the original is seen as quite lame.”
Germany’s own startup community has harboured similar feelings, with one group of Berlin startup entrepreneurs even calling for an anti-copycat revolution. “A couple of years ago, there was a lot of hatred towards Rocket,” says Gabriel Matuschka, a Berlin-based principal at venture capital firm Partech Ventures. “Rocket was just focusing on Germany and Europe, which meant they were going up against local companies. It was no fun to be competing against them.” Rocket’s head of communications, Andreas Winiarski, says that Rocket simply focuses on proven business models.
But German hostility to Rocket has subsided. “Unless you’re a complete moron you have to have respect for their size and what they’re doing,” says Matuschka.
The way Michael Franzkowiak, a former Rocket executive who left two years ago to launch a tech company on his own, sees it, Rocket has paved the way for Berlin’s budding startup scene. “An idea – for example selling shoes online – alone doesn’t guarantee success,” he points out. “Rocket deserves credit for its operational excellence and the speed with which the organisation learns and optimises its practises.” Indeed, Rocket itself can be seen as an internet concept as creative as Airbnb or Uber. As Winiarski notes, “execution needs innovation too”.
Rocket got its start in 1999, when the Samwer brothers discovered eBay in the United States and promptly built Alando, a site for the German market. Less than four months after Alando’s launch, the brothers sold it to eBay for $43m.
Today, Rocket, with its staff of some 500, has the resources to launch startups constantly, providing them not just with capital, expertise and access to centralised advertising but logistics as well. “Rocket can offer shared infrastructure services to its startups”, says Stefan Wagner, an associate professor in European Economic Integration at the European School of Management and Technology, a private business university in Berlin. “So, when it launches a new firm, say a website for shoes, that firm simply gets a few shelves in Rocket’s distribution centre or benefits from centralised IT expertise. That’s an advantage that other startups don’t have.” If a company doesn’t perform, Rocket quickly shuts it down, as it did with its Pinterest-inspired firm Pinspire.
Judging from its expected multi-billion-euro valuation, and lead investor Kinnevik’s £479m valuation of its 24% ownership in Rocket and its portfolio companies, Rocket has hit upon a lucrative business model. In an ironic twist on the imitation concept, several German companies are now trying to repeat Rocket’s incubation formula. Team Europe has a portfolio of more than 20 companies. Project A, which is run by former Rocket executives, now has 25 startups in its fold, one quarter of them Rocket-style incubation firms.
Project A co-founder and managing director Dr Florian Heinemann likens the process to casting for the TV show Germany’s Next Top Model, where you know what you want to create and then hire the people for the job. “But the majority of our ventures are acceleration projects, where we invest in existing teams and startups in early stages,” he explains. “We focus more on providing operational expertise than a regular venture capital firm does, particularly in key areas such as IT/product, business intelligence, performance marketing and HR.” Through this tech-age hand-holding, Project A hopes to minimise the startup failure rate.
This approach, Heinemann points out, is different from that of American venture capital firms, which tend to bet on outliers, extremely successful cases, and accept high failure rates in their remaining line-ups.
But even though using an existing idea seems fool-proof, it doesn’t guarantee success. “I always tell my students that copying isn’t easy,” explains Wagner. “Rocket is successful because it copies systematically. You have to offer a better or cheaper service; otherwise, why would people use it?” Beyond size, the advantage Rocket offers is its ability to quickly establish its ventures in local markets.
That’s because even though internet ventures are relatively cheap, running a global production line like Rocket’s requires deep pockets. “[Web browser pioneer-turned-venture capitalist] Marc Andreessen gets lots of headlines for raising large amounts of cash for Andreessen Horowitz, but Rocket has raised even more,” notes Gabriel Matuschka.
“You need a lot of people on payroll and a lot of cash in order to copy all these companies at high speed.” Winiarski says that last year Rocket raised $2 billion from blue-chip investors.
From Franzowiak’s perspective, what matters is not the manner in which Rocket creates companies but the fact that it’s managed to become a European tech behemoth that can take on US heavyweights.
Adds Nicolai: “The difference between -innovation and imitation is fluid. No idea is pure innovation. And imitators are often more -successful than the original.”
Just a thought: what would happen if Silicon Valley picked up Rocket’s business model?