Rocket Internet: Is There A Method To Its Madness Or Is It Just Bad For Innovation

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Editor’s note: Bernard Leong is co-founder of SGE, an online portal dedicated to entrepreneurship in Southeast Asia, and This Week in Asia, a podcast dedicated to tech news in Asia. Follow him at BernardLeong.com or on Twitter: @bleongcw.

A few months ago, I made a point that winter has landed in Southeast Asia with the fast and furious expansion of Rocket Internet, the Germany-based company started by the infamous Samwer brothers — Mac, Oliver, and Alexander. I concluded that, while the company may be bad for innovation, it has demonstrated good examples of execution and speed to the rest of the technology ecosystem within the region. While monitoring Rocket’s revolving door of executives, employees complaining about their ways, and startups — like Home24 – that shut down within a short period of time, I began to wonder: “Is it going to work or fall apart?”

What’s The Exit For Rocket Internet?

Even though their footprints were all over the globe, the Samwer brothers have not really conveyed exactly what their vision for Rocket Internet is except serving a few platitudes about how they might “change the world.” If you were to conduct a historical review of their past work – from Alando (an eBay clone in Germany) to CityDeals (a Groupon clone in Europe) — the pattern you would see is that they are basically cloning U.S. companies in the hopes that some of these titan U.S. companies (and they are known to being “suckered”) would prefer to “buy” versus “build” in the markets that they have little or no presence in. It’s a simple strategy that a lot of people think is easy to copy.

In life, what we believed to be simple usually ends up becoming more difficult when we examine things with a strategic overview rather than through marginal thinking. With their past successes, we can assume that the slew of 50 to 80 companies from Rocket Internet across the globe should find “buyers” in the process, and that becomes their exit strategy.

Of course, that seemed to be contradicted by Rocket Internet seeking investment in China recently, sources claimed. Rocket Internet has been very independent because the Samwer brothers have very deep pockets and are able to bankroll everything and give very little away. In fact, it is surprising to see they are trying their cloning strategy in China, where they have to contend against the best local clones who are obviously not sitting ducks that can be rolled over by the brothers.

Instead, Rocket Internet has struggled in China, and we should recall Groupon’s expansion disaster in the country years back under Oliver Samwer’s leadership. Assuming the founders of Rocket Internet are rational and operate with the German’s strong and efficient execution culture, China should have been left out of their map. Instead, they chose to go in and get clobbered even though they seriously screwed up the Groupon expansion the last time. From their current “debacle” in China, my view is that they have finally learned the lesson that it’s impossible for foreign operators to enter the Chinese market without a local partner. They are also shutting down their operations in Turkey.

In the meantime, are there any exits on the horizon? The answer is also not conclusive, given that they have cloned so many e-commerce platforms (Fab, Amazon) and ideas (Pinterest, Airbnb) and yet there is no activity as far as I have seen, and I have been keeping my tabs on the acquisition activity on the ground. Is it because their reputation has taken a hit after the Silicon Valley bashing of their methods and hence no big U.S. corporations want to touch them? You can fathom a hypothesis:

Suppose you are the corporate strategy team of a major U.S. company, say Zappos, where the company prides itself on customer service. Will you buy Zalora given that a lot of customers have complained about their customer service? That’s where the Samwer Brothers have learned the hard truth about cloning. Yes, they did have successes with Alando and CityDeals, because it’s because these companies have not really become big and they exist as clones to the startups.

Another option that emerged during a conversation I had with Benjamin Joffe is that Rocket Internet can gun for an IPO and raise public funds to build up the winners within their portfolio. Various sources in Southeast Asia have indicated that they have raised somewhere between US$50-$100 million from the investment bank J.P. Morgan to beef up their operations. The question is whether this is the first step from Rocket Internet toward an IPO.

With a global world interconnected via Facebook and Twitter, we are getting more information about their operations and implosion everyday.

The inconvenient truth is that the Samwer Brothers are excellent in cloning the operations and the IT platforms behind, but they are not good at cloning companies where the real strength is in the services part of the company. For example, Zalora is failing because it is unable to replicate Zappos’ customer-centric culture. It’s not something that you can do within three months using a spreadsheet and expect people you hire to behave like Zappos employees. It does not help when the terrain in Southeast Asia makes it really tough for digital payments and operations.

The Samwer Brothers did not realize that they have subsidized the start-up ecosystem of Southeast Asia, by helping us to train a lot more people for the environment. Of course, they have no patience for failures and hence we are now seeing the fruits of that. It is unlikely their exits are going to happen, and therein lies two choices for Rocket Internet: Build proper businesses by sinking in more resources (which is unlikely), or close the ones that are wasting resources so they don’t damage their bottom line. That’s why we are observing many clones starting to go on the chopping block. Of course, it also means that they are doubling down on the ones that have a moderate chance of succeeding.

My view has always been the same. While I do not condone their methods of ripping off other people, I see that Rocket Internet is a necessary evil to the startup culture within Southeast Asia. Not many people shared this view of mine and jumped to the conclusion that I condone their methods (which in reality, I do not). What I have always observed, is that the only determinant of success of any company is execution and not innovation. Hence, even if you have an innovative idea, you need to be able to execute the idea efficiently. To execute, you need people, and Rocket Internet’s strategy of hiring people is also failing in the Southeast Asia ecosystem. That brings me to my next point.

That Revolving Door Of Rocket Execs

Recently, I caught up with a few friends from the UK entrepreneurial community in Singapore. We had a casual chat about Rocket Internet and its influence on the European ecosystem. They shared their experiences of their first foray with Rocket Internet back in the days of the European Groupon clone Citydeals in London. “Is Rocket Internet’s hiring policy sustainable?” was a question that arose. We started to examine how Rocket Internet has traditionally hired their executives and foot soldiers.

To the best knowledge of our sources and various chats with former Rocket Internet executives, the company’s process for hiring top executives mirrors two institutions that value alpha-type hires. For example, people who graduate from top universities and have careers in history that have strong stamps on investment banks (Goldman Sachs) and management consultancies (McKinsey). On that level, their paychecks mirrored very closely to the market rate of their executive careers. On the other end, the foot soldiers are hired through new graduates from the local universities where they seduced them with medium-range salaries and the attraction that you should join their “startup” without the associated risks.

For the sake of discussion, we will stick to the top executive hires. Rocket Internet does not value business operators, but rather these alpha-type management consultants and investment bankers, as well as people with MBA degrees. The reason for their process could stem from their own origins. For example, Alexander Samwer has an MBA with distinction from Harvard, and, while there, he researched the top U.S. tech companies. He figured out that the strategy to make a lot of money is to clone them for the other markets and get acquired. People with this kind of profile tend to be ambitious and will stop at nothing to get things done. They are also highly analytic and have overall strategic viewpoints, so that they can churn out loads of spreadsheets and presentations to illustrate numbers and why they should be acquired.

In Southeast Asia, people with these types of backgrounds prefer to work in big multi-national corporations rather than in startups, hence a cultural disconnect: Their “strategic-level” thinking does not come with real business value execution. The backgrounds of the three executives who left Rocket Internet – Susie Sugden (former managing director of Lazada, Indonesia) and Nadiem Makarim (former managing director of Zalora, Indonesia), and Howard Soh (former CEO of Rocket Internet Malaysia) — fit the corporate profiles I have mentioned. By making this comparison, this article is not meant to degrade people with such backgrounds, but it seems that there is a pattern with Rocket Internet and its high revolving door of executives. In fact, Rocket Internet has a pipeline of such candidates and if they don’t perform within three months to a year, they are shuttled out of the door.

If you want to build a multinational corporation and a brand to last, three months are enough for the individual to figure out the structure and starting to cover his or her roles and responsibilities in the environment. So, the real question we should be asking is whether this method of hiring policy is sustainable.

So Is There Method In Its Madness?

The answer is probably yes and no. Yes, in the way they hire and fire, but no in creating companies that are of value to high-target acquirers. Many pundits within the ecosystem have expressed the view that they are excellent in execution of launching new Internet companies whether — web services or e-commerce companies — but fall short in building businesses with real value. That’s why we are hearing so many bad reports, and mainly in the space of customer complaints.

You can’t build companies on spreadsheets and exit strategies, because everyone is aware of the trick; just note the number of clones in China and everywhere else out there. Of course, all the other start-ups who are working to innovate should have a spreadsheet to track employees from Rocket Internet who might be leaving their gigs soon.

Author’s Note: This article originally appeared in SGEntrepreneurs.com but the author has made significant updates in this version regarding Rocket Internet receiving investment from J.P. Morgan. The content and opinions expressed in this article are solely his own and do not represent the opinions of the organizations that he represents or works for. The author acknowledges Benjamin JoffeJosh Ong and Jon Russell from The Next Web; Michael Smith Jr. from SpuulDaniel CerVentus from Entrepreneurs.my; and Rama Mamuaya from DailySocial.net for various discussions regarding Rocket Internet.