E-commerce in emerging markets is one of the keys to commerce maturation that will be seen globally in the next 10 years. The fastest growing ecommerce markets are not saturated like what is seen in the UK, US or South Korea. Thus investors such as Naspers, Tiger Global Management and Rakuten are competing against one another in emerging markets as every business wants to ensure that they have their share of the long term returns that will be seen in these markets.

However an online venture builder and accelerator from Germany entered into this race about 18 months ago and have in a very short period of time created quite a few market changing moments across the globe.

I want to define what is an emerging market in my own mind before we continue with the fascinating race seen in emerging market ecommerce.

An emerging market is one that geographic area which is inhabited by customers whom have means to pay for products but are unsure of new technology to ensure a transaction occurs on the Internet between the customer and a commerce business. The markets also faces barriers for foreign businesses which deem the market to be heavy for investment thus the investment is taken to another country or region. Barriers are: credit card penetration, Internet connectivity and logistics to deliver the bought item to the user.

Early emerging markets

There are 3 countries whom qualify for this in my mind. China, Brazil and Eastern Europe (Poland) were the early battlegrounds for investors to get early acquisitions. China and Brazil both contain some of the highest Internet penetration percentage seen anywhere in the world thus savvy investors wanted to acquire businesses. Millions of dollars were spent on acquiring businesses to ensure that no competitor could get term sheets and contracts signed with businesses.  These 3 markets are at the moment in my own opinion get close to being called matured ecommerce markets as the traditional global heavyweights (Amazon, eBay, Walmart and more recently Google).

When emerging markets 1.0 left investors without investments focused in market intelligence. Suddenly investment banks started focusing on China, Brazil, more parts of Eastern Europe and then Russia. These are geographically large areas in which many competitors could have businesses and investors could make returns on early investments. Russia has since become a difficult market to enter thorough infrastructure and regulatory challenges.

Fast Forward to today

Three brothers from Berlin saw the opportunity that the emerging markets would provide to investors. However, the Samwers realised that for them to be an “investors dream opportunity” they needed to do the whole business formation process seen in startups completely differently.

The basic idea, in the crudest sense, is that one of these “clone factories” sees a popular new startup doing well, recruits a team to quickly replicate the business model for a currently non-existing market, and then rides the popularity of the site until it sells for millions.

As I mentioned in my previous post about Rocket Internet, the business model boils down to personal choice and I will not debate here. The Samwers have made their success with Rocket Internet through taking successful ideas and making businesses out of them in new (emerging) markets.

Fred Wilson summarised it best for me:

It’s a free market out there. People can do what they want. That’s even more true globally. If you are successful, you will be cloned. That’s life. In fact, it’s a sign that you’ve made it when clones of your website, mobile app, and business start cropping up.

The Predictive Theory on Rocket Internet

Yesterday, Thomas Baldwin wrote an interesting piece on whether Rocket Internet is good for emerging markets.

First, Have a look at the Rocket Internet homepage:

What do you notice?

The businesses mentioned are all those whom have received funding in the last 12 months and are found in the 4 verticals that are inline with customer demand in various geographies. Fashion / Apparel, Electronics, Home goods and Food deliveries.

Thomas makes a few good points but I think he missed a few:

1. If you look really close at these markets that Rocket Internet entered, then there is almost no competition for the Rocket Internet businesses. The lack of competition in the verticals ensured that inside 12 months market leader status was achieved. After market leadership was attained then Rocket Internet approached the various investors for investment.
2. Rocket Internet, entered mature emerging markets later and in some cases closed businesses down. One country that comes to mind is the dismal results that Turkey provided that lead to complete exit from the country.
3. In quantitative terms Thomas does not mention how many business were started initially and what the total closures of businesses are over any period of time. In certain markets, they closed up to 80% of their businesses inside 12 months.
4. Predicatively one could argue that over the long term Rocket Internet was only on the road to success. I cannot think of any regions in which extra investment did not happen. Maybe North America, but Mexico counters that idea.
5. I have not been able to determine how much research Rocket Internet does about a country prior to entry. I have been waiting for them to aggressively enter Columbia, Mexico and Indonesia. Only over the last 2 weeks have news been made public on more focus on Columbia and Mexico…
6. Rocket Internet has also started going horizontal. Initially the idea was to launch multiple businesses in different verticals and then manage them. However after the success of Lazada in South East Asia consolidation occured. In Nigeria, Rocket started with Sabunta and Kasuwa and then merged them into Jumia which then became a multi-country platform (Morocco, Egypt, Nigeria and more recently Kenya)
7. I will also argue the point on supply chain / logistics development. In some countries they have provided the opportunity to use the Rocket Internet infrastructure. I am aware of Jablong provided something akin to “Fulfillment by Amazon” in India but in no other regions is it public knowledge that logistics development has occured.
8. The one major negative that is not mentioned in Thomas’s post is staff turnover. Rocket Internet has ensured the interns are now more widely used in emerging market. The extremely high staff turnover that happens a few times per year ensures that in my mind Rocket Internet does not get top ecommerce talent from more mature local businesses.
9. I have noticed something like a recurring theme with Rocket staff across the globe. Many of them start venture capital business to fund new businesses or they create accelerators inside their own businesses. I believe strongly that this is due to the conditioning that is received while being a Rocket Internet employee. Thus going into corporates or traditional bootstrapped or venture funded startups seldomly occur.
10. The lack of long term results. Rocket Internet has been operational since 2007 but there are limited examples of them exiting businesses that are created inside the emerging markets that they have entered. However, the business has raised over a Billion dollars and are at the moment in a period of limbo as it will take at least another 2 years to determine the success rate on the first class of funded businesses.

Final thoughts

Rocket Internet is going into an interesting period of time. Two of the Samwer brothers are part of a new venture fund called Global Founders Capital where does that leave them with Rocket Internet? Also is Rocket Internet around in 5 years time?