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Is there any method in Rocket Internet’s madness?

Is there any method in Rocket Internet’s madness? A few months ago, I made a point that winter has landed in Southeast Asia with the fast and furious expansion of Rocket Internet from the infamous Samwer brothers. In the process, I also concluded that while they may be bad for innovation but they would demonstrate good examples of execution and speed to the rest of the technology ecosystem within the region. While monitoring their revolving door executives quitting within 3-6 months, employees complaining about their ways and their startups shutting down like Home24 within a short period of time, we are beginning to ask, “Is it really going to work or fall apart?”

What’s the Exit for Rocket Internet?

Even though their footprint were all over the globe, the Samwer brothers have not really conveyed exactly their vision about Rocket Internet except serving a few platitudes about how they might “change the world”. If you start doing a historical review of their past work from Alando (an E-Bay clone in Germany) to CityDeals (a Groupon clone in Europe), the pattern you will see is that they are basically cloning US companies and hope that some of these titan US companies (and they are known to being “suckered”) will prefer “buy” versus “build” in the markets which they have a little or no presence in. It’s a simple strategy which a lot of people think that it’s 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 marginal thinking. With their past successes, we can assume that the slew of 50-80 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 from sources claimed. Rocket Internet has been very independent because the Samwer brothers have very deep pockets and able to be 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 to be rolled over by them. Instead, Rocket Internet has struggled in China and we should recall Groupon’s expansion disaster in China years back under Oliver Samwer’s leadership in the failing local deals company. 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 learnt the lesson that it’s impossible for foreign operators to enter the Chinese market without a local partner.

In the meantime, are there any exits in 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 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 US corporations want to touch them? You can fathom a hypothesis:
Suppose you are the corporate strategy team of a major US company, say Zappos where the company prides themselves on their 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 these companies have not really become big but exist as clones to the startups. 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 they are unable to replicate the Zappos’ customer centric culture. it’s not something that you can do within 3 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 subsidised 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 getting the fruits of that. It is unlikely their exits are going to happen, and there lies two choices for Rocket Internet: either one, they have to build proper businesses by sinking in more resources (which is unlikely) or close the ones (which are wasting resources) down quickly so that it does not damage their bottom line. That’s why we are observing many clones starting to go on the chopping board. Of course, it also means that they are doubling down on the ones which 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 comes to my next point.

The Revolving Door of Executives in Rocket Internet

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

Basically, their hiring process for top executives (to the best knowledge of our sources and various chats with former Rocket Internet executives) mirrored very closely to two institutions which value alpha-type hires, for example, people graduating from top universities and have careers history that have strong stamps of investment banks (Goldman Sachs) and management consultancies (McKinsey). On that level, their pay checks 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 stick to the top executives hires. Rocket Internet do not value business operators – but these alpha type management consultants and investment bankers plus people with MBA degrees. The reason for their belief may stem from the origins of the founders: for example, Alexander Samwer had a MBA with distinction from Harvard and he has used that time to research on the top US tech companies and figured out that the strategy to make a lot of money is to clone them for the other markets and get acquired. The reason for people with this kind of profile that they are go-getters and will stop to nothing to get things done, and they are also highly analytical and have overall strategic viewpoint so that they can churn out loads of spreadsheets and powerpoint to show numbers and why they should be acquired.

In Southeast Asia, people with these type of background prefer to work in big multi-national corporations rather than in startups, hence there is a cultural misfit, i.e their “strategic level” thinking does not come with real business value execution. If you look at the backgrounds of the two executives who left Rocket Internet Indonesia: Susie Sugden (former Managing Director of Lazada) and Nadiem Makarim (Managing Director, Zalora) are both consultants in their previous lives. By making this comparison, this article is not degrading people with such backgrounds but it seemed that there is a pattern with Rocket Internet and her high revolving door of executives. In fact, Rocket Internet has a pipeline of such candidates and if they don’t perform within 3 months, they are shuttled out of the door.

Think about this, 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. Hence, the real question we should be asking is whether this method of hiring policy is sustainable.

Rocket Internet: Is there method in their madness?

Probably, the answer is yes and no. Yes, in the way they hire and fire, but no, in creating companies which are of value to high target acquirers. Many pundits within the ecosystem have expressed their views 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 (and 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, and in fact, there are also a lot 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 gig soon.

3rd Update: Thanks to Benjamin Joffe for recommending the article to TechCrunch. The article is now published in TechCrunch on 17 Sep 2012.

2nd Update: Amir Karimuddin from DailySocial just reported that JP Morgan is going to invest heavily in Rocket Internet’s e-commerce Startup Lazada. Until the deal is done and properly announced, it may be too early to conclude that they have succeeded. Besides, the amount of money invested has not been disclosed. If they did secure the investment, it will mean that they have secured more investment to build up the businesses and hopefully managed the operations problems which they are currently dealing with. As pointed out in a twitter conversation (when this article is published) with Benjamin Joffe, one other possibility for exit is to do a IPO for Rocket Internet with each of their portfolio companies. Taking a company public does not mean that that particular portfolio company is successful. We have seen that happened to Groupon which are having problems at the moment with their business model.

1st Update: Yung Hui from GreyReview has notified me that Howard Soh, the former managing director and co-founder of Rocket Internet, Malaysia has a similar background to what I have laid out for the type of people hired by Rocket Internet. Hence another data point added.

Author’s Note: The content and opinions expressed in this article are solely of his own and does not represent the opinions of the organisations which he represent or work for. This article is written on 2nd Sep 2012. The author also acknowledges Josh Ong and Jon Russell from The Next Web, Michael Smith Jr from Spuul, Daniel Cerventus from Entrepreneurs.MY and Rama from DailySocial.net on various discussions regarding Rocket Internet.

Image credit: porschelinn



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