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Rocket Internet – a copycat business model

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Rocket Internet created a business model of “stealing” business models and combining them with a hyper-effective operating model!

In the startup space, the controversial venture builder Rocket Internet is an incredibly effective company and is on a mission to create the largest Internet platform outside the United States and China.  It employs 25,000 people and operates in over 100 countries with a laser-focus on three areas: eCommerce, marketplaces and financial technologies. Even though Rocket Internet is excluding the competitive American and Chinese markets, it still reaches 4.5 billion (65%) of all Internet users.

Rocket Internet’s model is simple. The company looks at successful American Internet companies in the aforementioned focus-areas and copies them outside the United States. Rocket is often criticized as an uninspired copycat, but critics continuously overlook the substantial innovation in its business and operating model.

Business Model

Rocket Internet creates value by repetition. In the United States, entrepreneurs and academics alike spend time and money to develop and establish new business models that capture value. Entrepreneurs employ methods like design thinking to increase their chances, but most often still fail along the way.

However, unlike a chemical compound, business models cannot be patented. Once a successful business model is developed, it depends on execution if the original business model inventor can extract value quickly or somebody else will capture value in the long run. Rocket Internet’s business-model is to copy proven American business-models and role these out more effectively around the world.

Operating Model

Rocket Internet championed how to transform a startup’s assets into valuable actions. Founder, Oliver Samwer, estimates that Rocket Internet has solved 95% of the problems that startups encounter during its growth phase. This makes a Rocket-backed startup-clone considerably more efficient than any “original” startup.

            Centralization: Rocket Internet gets significant economies of scale by centralizing certain tasks for all of its startups in its headquarters in Berlin. This means that product development, user experience design, marketing campaigns and legal work are conducted by seasoned developers, designers and lawyers. For instance, Rocket Internet employs over 5000 IT specialists in Berlin, alone, that develop the underlying platforms for its three major focus areas. When a new venture is started, those developers customize the prebuilt platform and thereby mitigate considerable technical risk especially in the areas of stability, security, scalability and speed. Once developed, all code, contracts and other intellectual property can be reused for future startups.

On the other hand, operations, sales and customer care are local and built by the startup employees that are on-site. Rocket Internet is great at localizing its products, because it leaves out these core functions from its centralization.

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            Team & Human Resources: Rocket Internet streamlined the startup HR-process. With years of experience, it found a successful formula on the management side by hiring away managers from a handful of prestige firms such as McKinsey, BCG and Goldman Sachs. Rocket can attract them by offering a comparable salary, yet only a low, single digit in equity. Thus, corporate types can feel like entrepreneurs, without the massive downside. Furthermore, hiring people from only a handful of firms makes founders interchangeable and mitigates the personnel risk of Rocket Internet.

            Financing: Rocket Internet collected over $2 billion from investors that can help companies in local markets and bureaucracies, especially sector-specialists, high-net-worth-individuals and strategic investors. Founders, who are usually preoccupied with raising round after round of financing in the beginning, can focus on growing the company and leaving the fundraising to the expert, Oliver Samwer.

            Benchmarking & Failure-Elimination: Rocket Internet measures everything. Comparing any venture’s key performance indicators (KPI’s) against its existing portfolio, Rocket can not only identify a problem early but also solve the problem through established best practices.
Rocket is diversified across markets and business models and quick to eliminate underperforming startups.

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Alignment

The operating and business models align perfectly. The business model is model is copying existing business models in narrow focus areas abroad, and out-executing the original founders with an hyper-effective operating model. Moreover, outside the U.S, Rocket startups are first-movers, which creates a high barrier-to-entry in growing markets.
The business model of “stealing” business model is an ingenious business model itself that is worth almost $8 billion and created startups worth tens of billions. Rocket Internet thrives on its sheer scale, which sustains its competitive advantage.

Of course, anybody could copy what Rocket Internet copies. Yet, creating an organization that has a pre-existing setup, which creates legal entities in 100 countries, sets-up a scalable IT infrastructure within 80 days, provides millions in finance on a whim and hires top-management and IT talent across the world is unprecedented.

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4 thoughts on “Rocket Internet – a copycat business model

  1. Markus, I found this very interesting although it is “controversial”.

    I don’t see anything wrong in the copy cat structure. If there is a need, having a proven model to follow is much easier and safer than having to create a new path. When everybody can copy the same model, companies compete on market entry time, management and human resources, and operation efficiency as you described in the post. It looks lie Rocket Internet is already a leader in the field.

    I am curious to know Rocket Internet’s view on its sustainable growth and innovation. Rocket Internet can do well by copying well. Is this what they just want to do for the rest of its future?

    1. Hey Z,
      Rocket Internet has shown that it beats American startups at their own game across the world, with one big exception: startups with network effects. Be it the Rocket’s Pinterest clone “Pinspire” or Rocket’s Airbnbn clone “Wimdu”, Rocket Internet falters when network effects, rather than execution, is key to the cloned business model. The implications are that Rocket might never be able to move significantly beyond its core areas in terms of product breadth. Rather, the company will expand in even more developing countries, and grow as the eCommerce market of in those countries grows.

  2. Hi Markus,

    Thanks for your post. Rocket Internet is a fascinating company and benefits tremendously from the copycat model that you outlined in your post. Moreover, my experiences working with Rocket-back companies and entrepreneurs (primarily in Southeast Asia) supports your thesis that Rocket’s universe of companies benefit tremendously from Rocket’s centralization in Berlin and, especially, its IT support. This has proven to be hugely valuable as their portfolio companies enter (and often compete with each other) in booming emerging market regions.

    My question is whether Rocket Internet or its companies can sustain it/their success after implementing their “growth stage playbook”. While their start ups often generate tremendous buzz, Rocket also suffers from high manager attrition and relatively typical (venture backed) portfolio company failure rates. To me, the question remains if Rocket’s “proven winners” can become profitable businesses in the long-term. This volatility and unproven track record also calls into question Rocket’s decision to go public last year. Wouldn’t Rocket and its companies be better off remaining part of a private company with less external reporting requirements?

    If you’re interested, I found this article in the FT thought-provoking: http://www.ft.com/intl/cms/s/0/28a2a164-7645-11e5-a95a-27d368e1ddf7.html#axzz3trO4fhnK

  3. Markus – thanks for sharing. I’ve heard about Rocket several times, but didn’t know their underlying business model. I’d be curious how frequently culture impacts the success between the central (German) and local teams. For example, the pace of work in Latam is typically slower than that of Germany. Furthermore, it sounds like each local team could be working together for the first time whereas the IT teams have had repeated success and become efficient at their tasks. Are local teams able to match the efficiency of the central team?

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