A few days ago, the German startup builder Rocket Internet announced it would cease to be a public company, delisting from the Frankfurt Stock Exchange. It was widely interpreted as bad news, both for the company itself and for the German tech ecosystem as a whole. After the demise of fraud-ridden Wirecard, Rocket Internet is another major player in the German entrepreneurial ecosystem to disappear from the reach of public market investors.
Rocket Internet has always been difficult to position on the map. Silicon Valley loves companies that don’t resemble anything that already exists. Its cult of the radical innovator inspires contempt for those who prefer to merely replicate models and strategies that have already been proven on more mature markets.
Rocket Internet, on the other hand, was long specialised in emulating what already existed in the US for more complicated markets: Zalando, a Zappos copycat it launched in 2008, now operates in 17 European markets; Foodora, a competitor to Uber Eats and Deliveroo, now serves customers in Europe, Australia, and Canada as part of Delivery Hero; Zalora, an Amazon clone, was launched in South East Asia in 2012; Lazada, another e-commerce company in East Asia also launched in 2012, has since been acquired by Alibaba; Jumia, the leading e-retailer in Africa, was founded in 2012 in Nigeria and then expanded in 14 African markets before doing its IPO in New York in 2019.
Imitation as a route to innovation
Is all the snobbery misplaced?
According to Chinese venture capitalist Kai-Fu Lee, while Chinese entrepreneurs might often begin by imitating their US counterparts, the sheer level of adversity and competition in their domestic market forces the more relentless among them, such as Meituan’s Wang Xing or DiDi’s Cheng Wei, to reveal a hidden potential as innovators. In this approach, imitation paves the way for innovation rather than replacing it, which can lead to successes just as (if not more) impressive as those in the US.
“Imitation paves the way for innovation rather than replacing it.”
This is the role Rocket Internet’s copycatting has played in Europe and elsewhere. The geographies on which it focused were lagging behind; radical innovators weren’t likely to emerge in such places. Only after a first generation of pioneers has triumphed against adversity can founders launch ventures in better conditions. It took Fairchild Semiconductor, the wholly-owned subsidiary of an East Coast industrial company, to pave the way for VC-backed startups in Silicon Valley.
Perhaps Rocket Internet’s intervention was necessary to spearhead the emergence of a fully-fledged entrepreneurial ecosystem in unsung places such as developing nations or… Europe. And to a certain extent, it has worked, as seen with the cases of Zalando (market cap €18bn), one of Europe’s tech jewels which was brought up in the Rocket Internet empire, and that of Jumia, which employs 5,000 employees across a dozen African countries.
Rocket Internet: the pioneer
Rocket Internet has been a pioneer when it comes to practices that are now critical:
- Hiring in-demand top talent from industries far removed from the tech world, starting with consulting and investment banking.
- Going through trials and errors when it comes to expanding a tech-driven business across national borders and in unwelcoming markets such as East Asia or Africa.
- The very notion of startup building — it was rather unknown before they popularised it and now startup studios are flourishing all around the world.
“Many are impressed by what Rocket Internet has achieved, but feel they’re not allowed to say it out loud.”
Why don’t more people recognise all that? Likely because, Europe being Europe — that is, caught in the web of the US-centric world — the narrative that dominates here is that innovation takes precedence over imitation. The Silicon Valley ethos, however ill-fitted to Europe and the rest of the world, still looms large in the minds of tech people in Europe because that’s who we think we must look up to. Many are impressed by what Rocket Internet has achieved, but feel they’re not allowed to say it out loud.
A bad move?
Rocket Internet’s decision to go public in 2014 was always considered a risky bet. In a world awash with cheap capital, it was becoming easier for ambitious founding teams to raise money to fuel their own startups, while Rocket Internet still had to deal with the pitfalls of building startups in-house and managing CEOs-for-hire. In the end, it had to cut back on its ambition of building businesses and reconcile itself with the idea of being more and more of a (very large) VC firm.
As a result, its market cap has been cut by more than half between 2014 and now. And indeed, the history of investment firms as public companies is not pretty:
- Georges Doriot’s American Research & Development Corporation, the first modern VC firm, was a public company, and that fact is widely regarded as one of the motives for its failure to deliver more than one smashing hit (in this case, Digital Equipment Corporation).
- More recently, there have been heated discussions around the idea of large private equity firms going public, with some objecting that it is difficult to command a premium on public equity markets when you’re a company exclusively focused on investing in other companies.
The truth is, the likes of Blackstone and KKR went public to try and match the firepower of their main rivals when it came to accessing and deploying capital in ever larger buyout deals. You can’t say the same dynamic is at work within VC. Not only do larger deals tend to generate much lower returns, in the case of Rocket Internet there was never really any competition to deploy capital in tech companies in the developing world and Europe.
We’ll see how Rocket Internet fares now that it is once again private: Will it try and revive its venture building approach? Or concentrate on deploying capital in other people’s startups? This much we already know: its rise has played an important role in the growing up of European tech.
(Global Founders Capital, Rocket Internet’s VC arm, is one of 15 VC firms that invested in Nicolas Colin’s firm The Family before 2017.)