New Delhi/Bengaluru: On a hot summer afternoon at the Time Tower building in Gurgaon, a 75-day-old start-up was shutting down. The smell of fresh paint, new furniture and an air of heaviness filled the office on the fourth floor. Indian laws did not permit foreign investment in an online retail venture and the risk of running the business was high. The start-up, Asasa.com, an online fashion retailer, would have to be shut down (even before it took off), the founders told everyone gathered there.
Asasa.com was Rocket Internet’s first venture in India.
It was 2011.
“How can they have not known?,” asks an executive who was present at the meeting in Time Tower on the day Asasa shut shop. “Why wasn’t the legal structure sorted before making the hires? We all knew Rocket Internet was ruthless, but this was sheer irresponsibility.”
Anyway, there was no one from Rocket Internet to pose the questions to: Oliver Samwer, one of the three Samwer brothers at the helm of Rocket Internet, and senior executives Daniel Walter and Rafael Strauch, who had initiated the process of hiring a team of 70-odd people from across the globe, were missing from the scene. The only people there were the founders, who had 25 days to wrap things up and sell whatever assets the company had.
That was a rare setback for Rocket.
Over the next few years, it would become one of the most influential Internet companies in the world. And then, almost as rapidly as it had risen to prominence, the company would fall. But we are getting ahead of ourselves.
Rocket is a Germany-based Internet conglomerate that copies business models proven in the US or China and adapts them to high-potential markets outside those two countries. The idea is simple: copy the original, hire young, hungry consultants and finance professionals as so-called founders to run the company, deploy massive amounts of capital to grow fast and overtake incumbents in two years or so, and sell at an attractive price.
Copy, adapt, hire (founders), overtake, sell.
That was the strategy and it worked for a while. So much so that in July 2013, Oliver Samwer boasted that the German Internet conglomerate was one of three online retail giants globally. He told the Financial Times newspaper in an interview: “There are three e-commerce companies in the world—Amazon, Alibaba, and us.”
Three years later, Rocket’s stock price has fallen (it went public in October 2014) to around €20, down from a peak of €56 in November 2014. And its shareholders have criticized everything from the firm’s strategy to its estimates of the valuations of its portfolio companies and its (and the portfolio companies’) corporate governance practices.
No other market illustrates Rocket’s decline more than India, one of the company’s most promising bets until last year. Today, Rocket has been forced into a humiliating retreat in the market.
Since the start of 2016, Rocket has sold Jabong and FabFurnish, two of its largest investments in the country, in a fire sale; its other holdings, Foodpanda, a food-tech company, and Printvenue, a personalized printing business, are struggling to survive.
Rocket has failed in India.
It’s a commonly held belief that the “Rocket model” wasn’t suited for India. That’s only partly true.
In fact, copying business models worked wonders for Rocket initially. Consider Jabong, the online fashion retailer that was its biggest play in India. In 2014, less than three years after its launch, Jabong was neck-and-neck with Myntra; Jabong’s revenue in 2013-14, at Rs.438 crore, was just Rs.3 crore lower than Myntra’s.
And in a start-up ecosystem where even the largest start-ups—Flipkart, Snapdeal and Ola—are copycats, mirroring a successful business model can hardly be termed a mistake.
But Rocket does seem to have gone wrong in another part of its strategy: hiring consultants and making them promoters (well, almost). These hires were up against local entrepreneurs, many of whom ran their start-ups as if their lives depended on it. Finally, like many others, Rocket was shocked by the start-up funding boom of 2014, which blew away its capital superiority. Forget governance, forget the commitment of the consultant-promoters, forget everything else—if the funding boom had not happened, Rocket’s India story might have been very different.
But it did.
Here then, in three parts, is the story of Rocket Internet’s Indian sojourn, based on interviews with several of the conglomerate’s present and former employees (including some of the founders, as it chose to call them) and research into documents filed with government departments. Rocket was yet to respond to Mint’s queries as of press time. None of the people Mint spoke to wanted to be identified.
In 2010, Germany’s clone kings, the brothers Samwer—Oliver, Alexander and Marc—were among the first global investors to spot and bet hundreds of millions of dollars on India’s e-commerce potential. They had seen a fair amount of success with Zalando (modelled after Zappos), an online portal for clothes, shoes and accessories in Germany. The trio wanted to re-create Zalando’s success in India, before Alibaba or Amazon entered the market.
Rocket Internet was founded in 2007, but its chief executive, Oliver Samwer, had early success in cloning an Internet business and selling it to the original. In 1999, he copied eBay’s auction site in Germany and sold it a few months later to the firm for $43 million.
That model continued to work for Rocket, which sees itself as a venture capital firm, incubator and consulting company all rolled into one. It created a clone of Groupon in Germany, traded it for stock in the original, and got a $170 million pay-off when the firm went public in 2011.
Indeed, even as recently as April 2016, Alibaba bought a controlling stake for $1 billion in Amazon clone Lazada, which operates in several South-East Asian markets, and is in fact the most successful e-commerce firm in the region. It was founded by Rocket in 2011.
But back to 2010 and India.
Then, like now, several Indian entrepreneurs were trying to build businesses by replicating business models that had worked in the US.
Strauch, Walter and Oliver Samwer identified three Indians to run their India businesses: Praveen Sinha, who was then working with McKinsey and Co.; Arun Chandra Mohan, who had just graduated from INSEAD; and Ankur Warikoo, who was already a venture partner with Rocket Internet. The three would front Asasa.com. And they would go on to play an important role in Rocket’s Indian story.
If Tiger Global Management’s Lee Fixel liked promoters who’d graduated from one of the Indian Institutes of Technology (IITs), then Oliver Samwer was obsessed with consultants (from McKinsey, Bain or Boston Consulting Group, preferably) and GMAT (Graduate Management Admission Test) scores.
During background and reference checks, if a GMAT score was not readily available, Oliver Samwer would ask the referrer to take a guess on what the candidate would have scored had he appeared for the test, according to one person who has worked closely with him.
In February 2011, Sinha, Mohan and Warikoo were invited to attend a boot camp in Berlin. The idea was to familiarize them and 40 other chosen ones from other emerging markets with e-commerce. They did a tour of Zalando’s warehouses, familiarized themselves with the company’s operations, and got acquainted with its tech platform. Go back and replicate this, they were all told.
Within a month of returning from Berlin, Sinha, Mohan and Warikoo had hired 70 people and were ready to go live. Rocket start-ups had several advantages over others. The founders did not have to evaluate tech platforms—they had access to plug-and-play ones that had worked for similar Rocket businesses in other markets. Nor did they have to raise money. They had a rich sugar daddy to back them for at least the first year—the most crucial period for any start-up.
Rocket designated these entrepreneurs as co-founders and managing directors, but offered them monthly salaries and a small stake in the business. These salaries were on par with or just below industry benchmarks in the first year, but once the co-founder survived a year in the Rocket ecosystem, they would see a sharp spike.
According to several people Mint spoke with at Rocket Internet and its portfolio companies in India, these co-founders held low single-digit stakes in the companies they were creating. As it became clear that these companies that they had created were worth hundreds of millions of dollars, some of these co-founders started reviewing their stake, the first of many friction points that eventually emerged between them and Rocket, the people said.
But we are getting ahead of the story again.
Asasa died a premature death and several blame Rocket for poor planning and execution. The three co-founders went their ways. Sinha went back to consulting, Mohan joined Rocket Internet and Warikoo left to launch SoSasta, which later became Groupon India, another Rocket Internet venture.
Back in 2011, the Indian government did not allow e-commerce firms with foreign investment to sell directly to consumers. Flipkart had created a complex structure to attract foreign money from Accel Partners and Tiger Global. However, such structures were weak and could have been easily challenged, had anyone wanted to challenge them. Rocket was wary (or maybe, as some say, not very smart). Either way, Asasa died.
But the company continued to be interested in India—especially because other e-commerce companies continued to attract foreign investment and still sell to consumers.
Structures and problems
Rocket eventually found a new set of lawyers who created a structure that it was happy with. Rocket would invest in a company that would only do business with other businesses (or operate as a B2B e-commerce company; Indian law allowed foreign investments in such companies). For each such company, though, Rocket would create a parallel consumer-facing entity run by an Indian partner.
Sinha and Mohan were brought back to lead the start-up, and a third founder, Lakshmi Potluri, was hired from Goldman Sachs in Hong Kong. Rocket Internet also appointed Heavent Sudhir Malhotra to oversee all Rocket operations in the country.
By September 2011, Rocket had identified a trusted Indian partner, Ashish Choudhary, to run the company’s consumer-facing business. It promoted Jade e-Services Pvt. Ltd, a B2B company that would accommodate the foreign capital it wanted to pump into the country. Simultaneously, Choudhary and his father set up Xerion Retail Pvt. Ltd. Rocket followed a similar model for each of its businesses, Printvenue, FabFurnish, Heavenandhome, OfficeYes and 21diamonds, creating customer-facing entities with names such as BlueRock eServices and Axel Retail Pvt. Ltd. Rocket didn’t invest in these companies, but the people Mint spoke to say it did control them. Mint couldn’t ascertain the nature of the agreements Rocket had with its partners who promoted these consumer-facing entities that gave it this control. Choudhary did not immediately respond to Mint’s queries.
The only exception to this structuring strategy was Foodpanda, which was run by Pisces eServices Pvt. Ltd.
So, did such a structure create room for any wrongdoings? Did the grey areas created by Rocket Internet itself make it difficult for the German investor to keep a tight leash on its operations? We will come to this in a bit (in Part 2 of the story).
Structure in place, the businesses grew. And how.
Growth at any cost
“… We are running a marathon in a Ferrari,” Oliver Samwer said while addressing the teams at Rocket Internet’s portfolio companies in 2012.
Samwer visited Rocket’s office in Gurgaon in March 2012. The three-floor office housed Jabong, logistics firm Javas, online furniture store FabFurnish and online home furnishings firm Heavenandhome.
Samwer was known for his inspiring speeches and the aggression with which he pushed all Rocket Internet companies to grow business by three times every month in their first year of operation. The first year was all about over-achieving GMV (or gross merchandise value, which refers to the value of goods sold on a site, but does not account for discounts or sales returns) and order volume targets. Only those founders who achieved these had a shot at surviving. Rocket was ruthless if its targets were not met; founders were replaced without prior warning, just like any other employee.
In its six years in India, at least 10 founders have left Rocket Internet companies. Foodpanda has seen the most churn.
Rocket was equally aggressive with its investments, though not much by today’s standards and when seen in the context of the funding boom of 2014. In its first five months in the country, Rocket invested $45 million in its portfolio companies.
Both Jabong and FabFurnish were high on Rocket’s agenda and Oliver Samwer’s message was clear—to create India’s No. 1 fashion portal and furniture brand in the fastest time possible. Rocket was in a hurry to replicate Zalando.
“Within one year Rocket quickly figures out if it wants to continue funding the venture or not. In the first year, if you can meet targets on orders and sales, then you are rewarded (in terms of compensation). Your salary jumps by multiples and you continue to get a lot of freedom in running the company,” a former CEO at a Rocket company said on condition of anonymity.
Rocket’s aggressive approach took everyone by surprise. Its companies dominated television and outdoor advertising. Service levels at Jabong were the best in the industry and the website was keeping pace with Tiger Global-backed Myntra.
Costs increased but the firm successfully created a strong brand recall and had a net promoter score (a tool used to measure the strength of a firm’s customer relationships) that was considered best in the industry.
Jabong’s expansion impressed other promoters too. Myntra’s Mukesh Bansal started tapping consultants for key roles and even offered Jabong’s Sinha a job, according to people Mint spoke to.
But the growth came at a cost. Rocket was overlooking several important areas that required control and audits. “It turned a blind eye towards everything… all it cared about was growth. We were asked to close contracts with vendors, no matter what it took,” said one of the early employees in Jabong. “Through 2012 and 2013, Rocket did not care about cost. Suddenly, at the end of 2013, we were asked to drop everything and focus just on cost,” the person added.
The former CEO says that’s typical Rocket behaviour. “After 18-24 months, suddenly Rocket will expect you to cut cash burn and still grow fast. And this is where most Rocket company CEOs stumble. You have to remember that such CEOs have never been true entrepreneurs. They are very smart people who have been habituated to executing with the help of unlimited capital. Now, they are being asked to be frugal. That change is hard to make, especially because they don’t have much skin in the game.”
The lack of skin in the game may have been a critical factor in the failure of Rocket companies in India. Thanks to growing media coverage and networking events, the co-founders at the Rocket companies realized just how much personal wealth the founders of other companies were creating.
“It was about ego, power and money,” said a senior executive at Rocket. The founders enjoyed significant power but they continued to spar with Rocket on their salaries and the stakes they held in the companies they had created, this person added.
“Founders did not have strong equity, did not get high salaries and were treated badly by people in Germany. Rocket had the habit of firing founders (globally) very quickly... this was creating a lot of insecurity and uncertainty among founders,” said another Rocket executive based in Germany. “There was no loyalty towards Rocket.”
Several people at Rocket Internet and at Rocket portfolio firms confirmed that Rocket was known for going back on promises to the founders on salaries and stakes. Things reached a stage where at least some of the promoters started working for themselves, not the companies, and definitely not Rocket.
Meanwhile, the lack of quick exits was beginning to worry Rocket.
Where it failed
Rocket was anticipating mega exits in India within three to five years of launching operations. It was used to quick exits. In the company’s measure, four or five years was a good time-frame for an exit. It exited CityDeal in four, Lazada in five.
But the Indian market evolved differently. It ended up being more capital-intensive than Rocket had anticipated. Amazon decided it would do its own thing. Till 2015, Alibaba showed no serious intent to enter the market. Jabong’s early discussions with Amazon for a potential sale at $700-$800 million went nowhere.
FabFurnish failed to click with the customer, especially in the face of competition from well-funded rivals Urban Ladder and Pepperfry.
Foodpanda, once a clear winner in the market, suddenly faced competition from new entrants Swiggy and TinyOwl, which were burning money to grab market share. Amid allegations of corruption and lack of corporate governance, Foodpanda saw its top leadership being changed thrice.
And flagship Jabong’s downhill story began in 2015 when Rocket added it to Global Fashion Group (GFG), an international group of online fashion stores in which it had invested. The founders and management had a clash of opinion over Jabong being part of GFG.
GFG was eyeing profitability ahead of an upcoming initial public offering (IPO) and wanted to cut costs. However, Jabong’s leadership believed that cutting costs at a time when a discounting war was on in the market could prove suicidal.
“GFG was not GMV-driven, it was only running after profits. However, Jabong at that time needed high capital,” said a top Jabong executive who was working closely with GFG at the time. Eventually, GFG’s IPO proved a non-starter and it decided to sell Jabong. In July, Flipkart, though Myntra, acquired Jabong for $70 million, a fraction of its peak valuation.
There is more.
In September last year, Mint uncovered instances of potential wrongdoings and weak internal processes at Foodpanda. In July, Mint and other publications reported on a forensic audit report that painted a shocking picture of corporate governance practices at Jabong and GoJavas, a former Rocket-owned logistics entity. The audit report didn’t directly allege wrongdoing by any individuals, but highlighted several flaws in Rocket’s processes.
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Over the next two parts of this series, Mint will look at the forensic report and the complex corporate structures that Rocket set up in India in the quest for quick growth and quicker exits. These structures, combined with lax internal controls and processes, exposed more flaws in the Rocket way of doing things, leaving it at the mercy of local partners and managers, and ultimately led to the unravelling of the Samwer brothers’ dreams in India.
It will also analyse the confidential report that was made public by multiple anonymous account holders on social media, and profile the key people in Rocket’s boom and bust story in India.