Monday, July 22, 2013

Lessons in Entrepreneurship: Rocket Internet Case Study (Copy Catting)

Posted By: George Deeb - 7/22/2013

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Germany-based Rocket Internet, the self-described world's largest internet incubator, is one of my favorite entrepreneurial companies on the planet.   The most important lesson they have taught the world is: you don't have to be the first mover in a space, to drive the highest ROIs.  Sometimes it can be more lucrative to copy good ideas where the concept is successfully proven in one region of the world (e.g., the U.S.), to then build "copy cat" versions of those sites as the first-movers in new geographic regions of the world (e.g, Europe).

What a genius business model.  Why waste money with the typical venture capital model of investing in ten unproven startups, to then hope one of them is a huge success where you make all your money.  In the Rocket Internet model, you are letting other venture capitalists risk their capital experimenting with ten new concepts, to see which one of those ends up being a huge success, to then copy that model for presumably equal success in the new geographic region.

And, then, guess what?  Once Rocket Internet has built up the key internet leaders in Europe, Latin America, Africa or elsewhere, then the companies which had the initial success in the U.S. typically come calling to buy the Rocket Internet "copy cats" as their platform to fuel their international growth, almost guaranteeing Rocket Internet a whopping ROI on their investments.  Proven idea + known exit = meteoric payouts.  Instead of the normal one in 10 chance for startup success, it is like a 5 in 10 chance of success.  Which takes a normal VC's 40-50% annual IRR, and catapults it closer to a 200-250% annual IRR.

Rocket Internet is often criticized for their model of stealing other peoples ideas's.  Frankly, I think that is not fair.  Good ideas are replicated by others all the time.  Just ask iPhone if they are happy with the Galaxy S4.  Or, Groupon if they are happy with Living Social.  From my perspective, Rocket Internet is simply practicing good business sense on a global scale. 

More importantly, Rocket Internet, does not behave like a VC firm.  They are actually an e-commerce-focused incubator helping to build and run these companies, taking the lessons of hundreds of predeccesor companies, and apply them to the new startups.  This allows them to work at light speed with an inhouse team of 250 engineers that can knock out a brand new site in a month.  And, we all know how important speed is for any startup's success.  Not to mention, taking a company global is typically a huge challenge for most startups.  But, with Rocket Internet's global strengths, they can literally launch worldwide in no time.  I love this model!!

The numbers speak for themselves.  Rocket Internet has built over 100 companies in over 50 countries on six continents in the last six years.  This includes several high profile, lucrative exits (e.g., Alando to eBay, CityDeal to Groupon, eDarling to eHarmony, Jamba to Verisign, Bigpoint to NBC, and Betreut to Care.com).  Today, Rocket Internet employs over 700 people and their portfolio companies employ over 20,000 people, to support several billion dollars in revenues created. 

And, success attracts high-profile capital and more success.  The company or its portfolio companies have raised in excess of $1.8BN in capital in the last 18 months alone.  Investors include billionaire Len Blavatnik at Access Industries, J.P. Morgan, AB Kinnevik (Swedish investment company), Holtzbrink (German publishers), Summit Partners, and Tengelmann (German supermarket chain).

Credit Rocket Internet's founders, the Samwer Brothers (Marc, Oliver & Alexander), who learned this "copy cat" model from their online-auction site, Alando, which they sold to eBay for $50MM.  And, then, launched Rocket Internet in 2007, to replicate that success with the proceeds from their big payday.

So, keep your eye on Rocket Internet's newest sites, Pinspire (based on Pinterest), Wimdu (based on AirBnB) and DropGifts (based on Wrapp).  I am sure they will not disappoint, if history is any guide.  And, don't forget, you don't have to be the first at bat, to hit the biggest home run.

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