Rocket Internet – Sprawling digital business empire
Start-up factory that turned the process of identifying, rolling out and scaling new businesses into an assembly line.
Company Overview
Rocket Internet (Rocket), the German startup factory, was launched in 2007 and nowadays operates in 100+ countries with over 30,000 employees across its network of companies. In October 2014, the company went public on the Frankfurt Stock Exchange, with valuation over $8.2 billion. Rocket specializes in taking successful internet companies that operate in one part of the world and replicating them in new geographies. Because of the implementation-focused approach, Samwer brothers – Rocket’s founders – call themselves “execution entrepreneurs”. Their success lies in the implementation of the go-to-market strategies rather than in the development of new product or service ideas.
Business model
Rocket is in the business of identifying proven business models and replicating them in the form of new ventures using highly standardized and optimized processes. The goal is to scale these companies to a leading position in their markets and eventually exit via IPO or sale. At the core, Rocket’s business model focuses on:
- Scalability – identifying proven business models that can be quickly replicable
- Capital efficiency – limited up-front capital requirements to test the viability of the business models
- Low risk – use of successful existing business models and launching them in the geographies with limited direct competition
Operating model
Arguably, Rocket has molded the process of identifying, rolling out and scaling businesses into an assembly line. It has done this using a unique operating model – a platform that enables scalability at relatively low risk and in a capital-efficient way. Rocket’s platform rests on four pillars that allow the company to create and sustain competitive advantage:
Source: GS Global Investment Research, November 2014
- Infrastructure
Rocket’s 30,000 workforce in more than 100 countries across six continents allows the company to build ventures at unimaginable speed and low marginal costs.
- Functional experts – help with the set-up and development of new ventures, and provide ongoing support and training to the growing and established companies within the Rocket portfolio. Moreover, they share best-practices and encourage knowledge flow within the network.
- Regional leadership – focuses on supporting ventures in specific geographies, providing local perspective and business know-how.
- Entrepreneurs – general managers of Rocket’s stand-alone ventures. These are highly educated and motivated people, often poached from top Investment Banks, Consultancies and PE shops.
- Partners – 3rd party sector and geography specialists, investors and entrepreneurs that act as advisors to Rocket’s functional experts, leadership and entrepreneurs.
- Process
Using its infrastructure and expertise, Rocket developed a set of processes and procedures that allow the company to launch scalable new ventures in under 100 days, thus minimizing costs and risk.
- Finding business models – Rocket is in the business of identifying proven business models and replicating them in the form of new ventures.
- Fast and efficient business model roll-out – Rocket aims to build and launch new ventures in under 100 days.
- KPI focus – For ventures surviving the incubation period, Rocket provides heavy infrastructure and network support. It puts strong emphasis on tracking day-to-day performance of the ventures using a set of industry-specific KPIs.
- Technology
Rocket has developed proprietary technology that give its ventures ready-made solutions to launch and scale online businesses.
- Technical infrastructure – Rocket has developed a core platform for each of three core sectors (ecommerce, market place and e-finance) that enables fast roll-out and scale of the business.
- Analytical excellence – Rocket has developed standardized reporting and analytical tools to measure performance of the ventures and help them benchmark against each other.
- Partnerships – Rocket is leveraging its size and reputation to secure competitive contracts with technology / marketing solutions providers such as Google, Facebook, Salesforce, Qlikview, etc.
- Network effects & Portfolio pipeline
- Knowledge sharing – there is ongoing knowledge transfer among the ventures in Rocket portfolio. Best practice sharing minimizes the start-up time, costs and improves efficiency.
- Synergies – Rocket leverages synergies across the network by negotiating contracts on behalf of numerous ventures to gain advantages of scale, sharing best practices and know-how.
- Portfolio pipeline – Launching several new ventures per year, Rocket secures consistent pipeline of opportunities and diversifies risks of an individual venture’s failure to succeed.
Road ahead
While Rocket has been very successful in replicating the Amazons and Ubers of the world, the learning-by-doing model often leads to costly mistakes and failed attempts to penetrate the market. This poses a question of whether it is better for Rocket’s competitors to wait and see what obstacles and mistakes the company has faced and enter the new markets with fresh energy. So far, being first has allowed Rocket to capture market share and offer superior customer solutions. Whether such a strategy will work in the future remains to be seen.
Sources:
- GS Global Investment Research, November 2014
- https://www.rocket-internet.com
- http://www.nytimes.com/2014/02/28/technology/copycat-business-model-generates-genuine-global-success-for-start-up-incubator.html?_r=1
- http://knowledge.wharton.upenn.edu/article/can-cloning-businesses-work-ask-rocket-internet/
- http://www.nytimes.com/2014/02/28/technology/copycat-business-model-generates-genuine-global-success-for-start-up-incubator.html?_r=1
Very interesting, thanks Kat! At Sequoia, we always spoke about how important it is for the founders to have a significant share in the company (try to dilute them as little as possible). From my understanding, Rocket takes a majority stake and CEOs (/founders) are mostly on a salary and a very small share? For an early stage company, it seems to be much more important for the founders to be extremely invested in both time and capital with a significant potential upside. Also it is important for them to share the long term risk as they take key strategy decisions early on. Do you think Rocket’s model of taking on CEOs who have limited stake in the game, eliminates the advantages of a entrepreneurial young company that is looking to disrupt established setups? I am seeing some of my colleagues from McKinsey lead some Rocket Internet companies with the mindset of ‘running someone else’s company for a while’. Also might the comfort and backup of being part of the Rocket Internet family affects the company culture – make it more sluggish, maybe bureaucratic? Is it true that the penalization for failure is lesser, given some of the elements of the business model you mentioned above?
Very good points, Surabhi.
Co-Founders / MDs (in Rocket jargon, this is top management running the venture – not necessarily from its inception) receive a relatively small equity stake and salary equivalent to the base at top banks / consultancies (usually matched with people’s salary at former employer). Fixed component therefore doesn’t change, while the variable one becomes the function of people’s performance at the job. Rocket is monitoring very closely the day-to-day performance of all of its ventures, thereby ensuring that targets are met and assess whether it is worthwhile to continue financing the projects. People who fail to meet their targets are quickly replaced, which creates a competitive and aggressive culture. Given the above, motivation is not really an issue but Rocket’s operating model does come at the expense of poor culture and very high turnover.
Specifically, unsustainable culture and heavy operational reliance on parent company become an issue for those Rocket ventures that scale and want more independence. I think this is a result of extreme focus on short-term performance and as you pointed out, lack of (early stage ventures’) management’s buy-in in the long term vision of the company. In ventures that survive the incubation period and continue to grow, it becomes increasingly difficult to change the organizational culture and establish intra-company processes that are less reliant on parent company (i.e. Rocket).
Great article Kat. While they do a good job of aligning their business and operating models, one wonders if that business model is the right one.
Is it possible that Rocket’s “Venture Capital” model is costly and often premature for some of the markets they operate in? Their businesses make money but only after spending twice as much. Employee turnover is high. It appears all the businesses exist for the sole purpose of being sold to a strategic buyer. And in this scenario, without a sale, there is limited value creation. The stock market can see that and is thus punishing them – they currently trade lower than the IPO price a year ago.
Only time will tell if they can turn this around.
Thanks Bankole!
Business model is indeed very capital intensive – while only 6% of the capital invested has been lost (ventures closed down), the majority of the remaining ventures face very long paths to profitability. I’d argue that Rocket’s strategy relies heavily on success of “black swan” ventures to support the operations (= enormous cash burn) of the rest of the portfolio. Throughout the history, they had several successful exists (i.e. Alando – sold to Ebay, MyCityDeal – sold to Groupon, Zalando – IPO ’14) where the strategy proved successful and given the size of these exists they were able to not only recoup the early losses, but also to make a significant profit.
Depending on the stage its ventures and their associated risks, Rocket divides its portfolio into Proven Winners, Emerging Stars, JVs, Concepts and Others – analysts valuations of these ventures are very diverse and lead to a huge range of the parent company’s valuation (from $10bn – $70bn). This points to the enormous risks associated with the business model. I’d argue one needs to be in for a very long term to reap the benefits…
Thanks Kat, very well articulated article! You have explained very clearly the strengths of the Rocket internet model, and how they built very strong capabilities to serve their business model, specifically on scalability and capital efficiency.
I have heard and read many views about their “aggressive” people culture, leading to low employment turnover cycles (this might also be the result of employing entrepreneurial persons who ultimately leave to launch their own startups); so I was wondering about the sustainability of their ventures, specially post IPO or sale if they are not able to lock-in key employees.