Earlier today I read Thomas Baldwin’s post on Rocket Internet preparing to go public and I must say it is at the moment a rumor. What is the ramifications if they do go public?

Preface

The last 18 months – I have been reading and observing a German accelerator going through the gears and starting businesses faster than I have ever seen any company do. They are a controversial topic and have 3 brothers that are the commanders in chief of this business.

They are not everyone’s cup of tea nor are they without any controversy. Blitzkrieg and all of the other things that have gone into the public domain makes going public a interesting move, if true for Rocket Internet.

Driven by success

The Samwers are some very clever business people and what they have achieved should not be discredited. They have started a lot of businesses, hired a lot of staff, closed businesses and retrenched staff on a scale I have never seen. They are obsessed with execution and ROI. Whatever they do it is with one thing in mind – success.

I am not going to debate their way of operation. They do take ideas from first world markets (Amazon, Zappos, IKEA, Square and Groupon) and then create businesses based on these concepts in emerging markets. Call it cloning, copying or whatever it is, it has made them handsome returns. The results seems to be good for their investors which is the prime focus for a startup accelerator. Ultimately, it boils down to culture and personal beliefs. You either like it or hate it. There is no in the middle with the way in which Rocket Internet operates.

Yes, they started an eBay clone and sold it to eBay and in most cases they start the business with an exit to the founding company as the end goal. As far as that is concerned, one can only but wonder how many businesses are selected with this end in mind?

The Samwers are like most Internet executives in ecommerce – secretive and focussed. The secretive is understandable as ideally you dont want to show your hand before launch. In normal startup creation these businesses are called stealth’s. The difference that I have observed with how Rocket Internet operates and the norm is that they open businesses in one region together. One country in general for a new concept is the norm but not for Rocket Interent.

In South East Asia – they opened 5 regions in a space of hours with Lazada. So in a sense their competition is on the back foot from the beginning and the momentum is then with the Rocket Internet businesses. Momentum is one of the most under appreciated ecommerce business factors and it can make or break businesses. I have seen it first hand and it normally leads to sad events like terminations  and retrenchments.

The thing that really surprised me is that if one has a close look at their holdings – certain verticals are seen across the globe. It makes sense and ensures that business intelligence can be shared across the globe between the various businesses. Why re-invent the wheel when you can schedule a conference call with someone who has already faced the problem? That makes competition against Rocket Internet businesses a tad more difficult.

The last 6 months

If your day job is an emerging market ecommerce business then I am willing to say a Rocket Internet business has crossed into your conversations, thoughts and potentially have an had an impact on your business.

However, when one look into the past 6 months the businesses have raised capital aggressively. JP Morgan had the first mover advantage in joining long term Rocket investor Kinnevik as an investor of the accelerator. Rocket Internet in my mind have had a game plan to ensure that they get their operations in a good standing before making a big call. I must confess, I have been wondering what is going on behind the scenes – as a lot of coverage world wide was done on the Rocket Internet funding businesses. More on that in a bit.

If you look at their portfolio of holding a couple of themes emerge: In the really long term markets (Africa, the Middle East and South East Asia) fashion and other non competitive verticals (Home goods, food delivery, fashion) were chosen to compete with. In some parts of the world they have only invested in one specific vertical. The point is that the whole idea is to create market leaders and not compete with established market leaders in competitive verticals. It makes the success so much easier to attain and also the ROI to have greater value in the long term. Investing large amount of money online to acquire attention and eyeballs and users will use their product above a rival company. Sometimes the competitor is not even in the same channel as seen with Zalando.

The Jewel in the Crown

There is one business that the Samwers hold as the model for their other holdings. Zalando, their European version of Zappos is the jewel in the crown of the Rocket empire. The business does not have enterprise software on their servers – everything is custom built by Rocket developers. Sounds alot like what Amazon had to do with their software right?

Zalando, is not aimed at any online competitors but is rather aimed straight at retailers whom have been making revenue on customers who have no alternative to buy merchandise from. Zalando has an all star cast of investors  and is a business that I think will be the one which will be added to the IPO offering.  Zalando has been largely kept away from new investors to ensure capital injection into new markets like Latin-America, Africa, South East Asia and the Middle East.

Fashion, I believe is Rocket Internet’s chance at a long term sustainable business, simply through their longer experience with the vertical.

The funding engine

Rocket Internet has a variety of investors. Some investors are only relevant for a business (DST), a range of businesses (JP Morgan Asset Managers) or fund the Rocket Internet accelerator (Kinnevik).

Kinnevik

Kinnevik owns 25% of Rocket Internet following the exercise of warrants during the first quarter of 2012.

Kinnevik works closely with the founders of Rocket Internet in order to start up companies and develop them into leading Internet players. During the past year a number of companies have been established in emerging markets where Rocket Internet’s online expertise can be combined with Kinnevik’s experience and network.

Besides the 25% investment into Rocket Internet, Kinnevik has also invested directly into a number of companies founded by Rocket Internet in the following segments:

  • E-commerce of shoes and fashion, with Zalando in Europe; Dafiti in Brazil, Argentina, Chile and Mexico; Lamoda in Russia; Namshi in Middle East; The Iconic in Australia; Zalora in South East Asia; Zando in South Africa as well as other newly started companies in other emerging markets.
  • E-commerce of furniture and home décor, with Home24 and Westwing in Europe and a number of other companies that have been started in emerging markets.
  • E-commerce of general retail and sports goods with Kanui in Brazil, Lazada in South-East Asia, Linio in Latin America and a number of other companies that have been started in other emerging markets.
  • Marketplaces for brokering short-term housing through the companies Wimdu and Airizu and place for food ordering through Foodpanda.

Other investors:

The above creates an impression that they have received a lot of investment from the US and only on certain cases the investment has come from a European fund. It does seem that New York loves Rocket Internet businesses. That is interesting and does show to a degree that they are “selling” the opportunity to invest in emerging markets in mind.

Oliver Samwer in October 2012 made his high expectations for investments in Rocket Internet clear: “I raised this year so far half a billion euros… I think by the end of this year, three quarters of a billion for this year.” $750 million in 2012, impressive but impossible to verify.

IPO – What changes?

When Thomas Baldwin made mention of the preparation of Rocket Internet to go Public – a few things started making sense to me:

  1. A definite focus on businesses that make revenue over those non performing businesses. They have cut their portfolio aggressively, since October. Why? If the balance sheet contains cash guzzling businesses making no return, it raises management concerns for potential institutional investors.
  2. There has been in my opinion a definite focus on fashion across the globe for Rocket Internet. Why? Well, what will Rocket Internet be offering potential investors? A chance to get into the action in developing economies which contains aspirational customers wishing to spend money on luxury items. The emerging markets is where return on investment is going to be in the coming years.
  3. Rocket Internet – has the ability to invest more capital into successful business as the IPO potentially will raise money that can be invested for the long term. Profit which is not being made in a majority of their holdings is no longer a short term driver for Founders.
  4. I can see that Zalando potentially being spun off into a separate entity in the future after the initial IPO and also maybe going public.
  5. I believe that in certain high growth markets – other businesses will consider buying the Rocket Internet holdings. Let me be clear, the various Amazon clones won’t be acquired by Jeff Bezos and his team. It is not in their DNA to make long term bets on developing markets.
  6. The additional money raised will trickle into businesses that can aggressively hire local talent. This is a big one for me as talented local individuals build successful businesses in the country in which they reside and not International staff.
  7. The raised capital can be used to pay back their long standing investor, Kinnevik.
  8. Public ownership will also draw more scrutiny to how they operate, hire and treat their staff.

Does Rocket Internet now become a factor in emerging markets?

I would think so as they have created a diverse portfolio of holdings. Do they change and became an investor into other non Rocket Internet businesses? I don’t think so as that is not the model which has made them successful. They have a recipe that works and I cannot see it changing.

If they go public then this could be the start of a very interesting period in ecommerce in emerging markets.

Disclaimer: These are my own views and has been formed through observations and a ton of long form content on the business. I don’t know the Samwer’s personally, have not worked for them nor have any first hand experience of their culture.