Copycat model a success for start-ups

For Linio, think Amazon for Mexicans. For Zalora, think Zappos for Malaysians. For Easy Taxi, think Uber for Nigerians. And for all of them, think Rocket Internet, a budding tech empire here in Germany's capital.

From its low-key offices near the centre of Berlin, Rocket Internet has turned the usual business model for technology companies on its head, compiling a team of high-flying finance and management specialists and arming them with the money they need to mimic already successful internet companies – applying these proven ideas in other countries, often in emerging markets.

Since 2007, Rocket has backed about 75 start-ups in more than 50 countries that now generate more than $3 billion annually and employ about 25,000 people.

The business model stands in sharp contrast with the ethos that dominates Silicon Valley, where originality is perceived as the main currency for successful start-ups. It also has raised questions over whether Europe's tech sector can ever foster the same level of innovation that has led to a conveyor belt of successful US tech giants like Oracle, Google and Facebook.

Still, Rocket balks at criticism that it is purely a copycat machine. It says that all successful business ideas are somewhat borrowed from others and that the ability to take proven tech ideas to emerging markets is a skill in itself. The small start-ups that Rocket supports are often given as little as six months to succeed or face being shut down.

"If there's a clear business model that is proven to work, we will look at it," says Oliver Samwer, who started Rocket Internet with his brothers Marc and Alexander. "Every new company is like a speedboat and we want them to become aircraft carriers."

Rocket Internet and the startups it incubates are known for aggressively expanding into new markets and squeezing out local rivals. Zalando, a German copy of U.S. e-commerce firm Zappos, has spread to 15 European countries since starting in 2008 and reported a 52 percent rise in its sales, to $2.4 billion, last year. Rocket Internet recently sold its remaining stake in Zalando, which is valued at around $5 billion, to Swedish investment company Kinnevik, one

of Rocket’s main investors, although the Samwer brothers retain a stake through their own investment firm.

Other Rocket-backed startups, including Latin American e-commerce site Dafiti and its Russian counterpart Lamoda, also have secured large market shares in some of the world’s fastest-growing developing economies. To succeed, they have had to tweak their business models for emerging markets. That involves offering cash-on-delivery services where few consumers have credit cards and running large fleets of delivery trucks where local logistics and infrastructure remain basic.

The rapid expansion has fueled speculation that some of the tech firms could either be bought by larger U.S. rivals or become public companies through multibillion-dollar initial public offerings.

“Rocket has disrupted the entire venture capital industry,” said Christophe F. Maire, a leading Berlin-based investor who has backed several of the city’s best-known startups, although none from Rocket Internet. “It has groomed a lot of people in the art of going international.”

But the success has also raised questions about the value of a company that essentially depends on the ideas of others. Although the Rocket-supported companies are free to copy existing tech businesses as long as they do not infringe on copyrights and trademarks, there is nothing to stop competitors from pursuing the same strategy. And some companies have already parroted Rocket’s business model.

While the company has created a growing stable of e-commerce startups, it has had less success with other Internet businesses. The company’s version of Pinterest, for example, which allows people to share photographs and other media, has so far failed to win over many consumers.

And after Airbnb held talks in 2011 about acquiring Rocket’s Berlin-based copy, the US short-term housing website eventually decided to beef up its own international operations instead.

Some in the global tech industry question whether it can maintain its success rate, as start-ups from Silicon Valley to Singapore look to expand globally as quickly as possible. That could cut the time Rocket Internet has to replicate successful tech ideas in emerging economies.

"Just copying what the Americans have done is no longer a sustainable model," says Simon Cook, chief executive of the European venture firm DFJ Espirit.

So far, though, no one has found the kind of success that Rocket has.

“We don’t worry if someone else has launched a similar business model before,” says Oliver Samwer, who receives monthly updates on the company’s startups during a marathon 20-hour conference call where each business leader is allotted just 30 minutes of Samwer’s time. “The internet moves at Formula One speed; execution is the most important component of a successful business.”

The track record of the Samwer brothers behind the company dates to the first dot-com boom when they sold Alando, a German version of eBay, to its larger U.S. rival for $50 million. The entrepreneurs, who were in their mid-20s, built and sold the startup in less than 100 days.

After the eBay deal, they used some of the proceeds to start Jamba, a mobile phone services company that produced the Crazy Frog ringtone, which they sold to U.S. tech company VeriSign for $270 million in 2004. The three German brothers also have bought and sold stakes over the years in a number of high-profile U.S. startups, including Facebook, Groupon and Zynga, which have gone on to become household names.

Now, they focus on building startups around the world. And the formula is relatively simple.

Typically, Rocket's core team finds the ideas (on a few occasions, outsiders have brought them business plans), then brings in entrepreneurs to run the businesses. The Samwer brothers give MBA graduates and former banking traders – often from companies like Goldman Sachs and McKinsey – as much as $20 million in early-stage investment. They are then sent to places like Moscow and Jakarta, Indonesia, where US rivals have yet to establish a strong foothold. Along with borrowing ideas from some of the world's largest and most established e-commerce companies, the company's entrepreneurs also have emulated younger businesses like Square, the mobile-payments company founded by Jack Dorsey, the chairman of Twitter.

The pressure is intense on the start-up managers, who are usually paid a salary and do not receive a major stake in the company they operate. Several current and former employees, who spoke on the condition of anonymity because they did not want to harm their career opportunities, remember high-pressured arguments when financial targets were not met and late- night calls from senior managers ordering them back to the office.

But Ralf Wenzel (35) and his company are evidence that the method works. As the co-founder of FoodPanda, an online takeout delivery service for restaurants that mirrors the popular US company GrubHub, Wenzel juggles a 650-person team spread across more than 40 countries. Large flat-screen televisions throughout the open-plan office keep the staff of FoodPanda, which was founded in 2012 and has raised almost $50 million in venture capital, on top of food deliveries ranging from sushi orders in Moscow to takeout burgers in Hanoi, Vietnam.

He spends roughly 80 per cent of his time travelling between the company's international offices. "Getting to these new markets quickly gives us a huge competitive advantage." – ( New York Times service)