Original Source: http://on.wsj.com/2a50vYb
German tech company has created 100 startups, many of which remain unprofitable
Rocket co-founder and Chief Executive Oliver Samwer once was hailed as Europe’s great hope at rivaling the startup prowess of Silicon Valley. These days, the 43-year-old and his executives are explaining why Rocket isn’t another tech-bubble bust.
PHOTO: BRITTA PEDERSEN/DPA/ZUMA PRESS
By STU WOO and FRIEDRICH GEIGER
July 17, 2016 6:40 p.m. ET
BERLIN—In 2011, German tech company Rocket Internet SE spotted a Swedish web company delivering ready-to-cook meals—recipes and ingredients packed in a box. So Rocket did what it does best: It launched a copycat business in other countries.
Its knockoff, HelloFresh, boomed on three continents, including in the U.S., where it competes against other imitators such as Blue Apron and Plated. Then trouble hit.
Last November, Rocket pulled the plug on an initial public offering of HelloFresh, which had been valued at €2.6 billion ($2.9 billion). In May, HelloFresh reported first-quarter losses more than tripled, to €27.3 million, despite soaring revenue.
It is just one of many deeply unprofitable companies in Rocket’s stable. The company—essentially a publicly traded “incubator” of startups—has created an empire of 100 companies in 110 countries with 36,000 employees. Several sell food. Some peddle used cars. One offers laundry services.
The company is in many respects a microcosm of today’s global web startup scene. At this point, Rocket and its portfolio of clones are the epitome of the global tech downturn, struggling to prove that they can be profitable.
An offline shop of Fashion for Home in Berlin. The furniture retailer was bought by rival Home24, a startup launched by Rocket.
PHOTO: HANNIBAL HANSCHKE/REUTERS
In April, Rocket slashed the estimated value of one of its biggest—Global Fashion Group—from about €3 billion to approximately €1 billion, citing share-price movement of its peers, its continued unprofitability and its emerging-markets presence.
The same month, Rocket reported the combined adjusted losses before interest, tax, depreciation and amortization of eight of its major companies for 2015 was €1 billion. Investors have dumped shares. Rocket’s stock price is only a third of its peak in 2014. The stock closed at €18.52 on Friday.
Rocket also is losing a longtime partner and co-investor. Swedish conglomerate Kinnevik AB had joined Rocket in pouring money into new companies.
Last year, Kinnevik’s chief executive resigned as Rocket’s chairman. A few weeks ago, Kinnevik removed both its directors from the board, saying the company increasingly was competing with Rocket for investment targets, and adding that board representation would be a conflict of interest.
Rocket board Chairman Marcus Englert called Kinnevik’s decision “straightforward and understandable.”
Rocket co-founder and Chief Executive Oliver Samwer once was hailed as Europe’s great hope at rivaling the startup prowess of Silicon Valley. These days, the 43-year-old and his executives are explaining why Rocket isn’t another tech-bubble bust.
In a recent interview Mr. Samwer promised to give investors better guidance. “The public market is something that we’re learning,” he said.
Mr. Samwer said over-aggressiveness led to some mistakes, but he remained confident in the company’s strategy. Rocket startups need to spend and expand heavily for five to nine years before turning profitable, he said. Losses are narrowing, and Rocket has plenty of cash on hand, he added.
Rocket’s combined adjusted losses of seven top holdings were €140 million in the first quarter, compared with €180 million a year earlier. Aggregate revenue rose to €530 million in the period from €400 million a year earlier. Rocket said it had €1.8 billion in cash at the end of last year.
“The core of our DNA is execution,” said Chief Operating Officer Johannes Bruder. “Rocket Internet functions like a factory or shipyard for start-up companies. You’ll see a lot of flow charts that summarize the systematic process we use to build our companies.”
Rocket was founded in 2007 by Oliver, Marc and Alexander Samwer, brothers from Cologne, Germany. Their first major success came in 1999 when they started a German clone of auction-website eBay Inc. They quickly sold it to eBay.
Rocket focuses on startups selling food, clothing and other merchandise and services via the internet. It begins with a controlling stake in the startups and either retains those shares or gradually sells them off to outside investors.
Tweaking its strategy two years ago, Rocket now also invests in companies it didn’t create, mimicking what traditional venture-capital firms do.
In 2014, Rocket listed itself on the Frankfurt Stock Exchange in Germany’s biggest tech IPO in a decade, raising €1.6 billion at a €6.7 billion valuation.
On the top floor of its seven-story headquarters, employees monitor tech startups world-wide for businesses to copy. When an idea is approved, Rocket assigns marketers, engineers and managers.
As the business develops, it moves down floor-by-floor, eventually making it to the ground level, where managers start to look for offices outside the building.
Rocket assigns a team of its own employees to start a company and then hires full-time workers for the clone company, which gradually returns them back to Rocket.
Startups, however, have hit operational and cultural challenges during their dizzying expansion, and they face new rivals that copied the idea that Rocket has imitated from others.
“Rocket needs to copy a business model at a point where it’s still in the making,” said Simon Schmincke, the former U.S. chief executive of HelloFresh.
The jury is still out on HelloFresh. The meal service makes weekly home deliveries of boxes filled with ice packs, gourmet recipes and enough ingredients for only those recipes.
HelloFresh is battling rivals in the U.S., and rejection in at least one country, France, where consumers have turned up their noses at the concept. Two former HelloFresh executives said the company didn’t attract as many subscribers as expected when it launched five years ago. They said one impediment was that the service appealed to a niche audience: affluent 20- or 30-something couples who consistently prepared dinner at home.
Mr. Schmincke, the former HelloFresh executive who is now at a Swedish venture-capital firm, said he believes the company will evolve into a profitable business. Oliver Samwer said HelloFresh and other Rocket-portfolio companies are on track.
—Matthias Verbergt contributed to this article.
Write to Stu Woo at Stu.Woo@wsj.com and Friedrich Geiger at friedrich.geiger@wsj.com
