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Rocket Internet’s crown jewel Jabong was bought by Flipkart at a ridiculously low valuation of $70 million, 95% lower than the $1.2 billion which it was asking for a little more than a year ago. Photo: Reuters
Rocket Internet’s crown jewel Jabong was bought by Flipkart at a ridiculously low valuation of $70 million, 95% lower than the $1.2 billion which it was asking for a little more than a year ago. Photo: Reuters

Entrepreneurship can’t be outsourced

Rocket Internet's Jabong sale shows that you can't buy entrepreneurship, and if you are attempting to, make sure that it's aligned well

Rocket Internet—Europe’s most well-known start-up incubator, which has made billions of dollars by building and flipping copycats of successful Silicon Valley start-ups—had one very hard lesson to learn from its experience in India: you can copy the business models, but you cannot outsource entrepreneurship.

Founded in 2007 by three German brothers, Rocket’s business strategy is to fund clones of Silicon Valley start-ups, grow them at lightning speed in top Internet markets in Europe, South America and Asia and, after achieving a significant market share, sell them invariably to the companies they were cloned from.

Rocket had been able to do this successfully in various markets and so was valued at €6.7 billion ( 49,800 crore) in its listing on the Frankfurt Stock Exchange in October 2014. But this strategy has come a cropper in India, mainly due to the management challenges it faced in its various companies in the country.

The most recent is the fire sale of its crown jewel—Jabong, which was bought by Flipkart at a ridiculously low valuation of $70 million, 95% lower than the $1.2 billion which it was asking for a little more than a year ago.

With its flagship going for a song, Rocket has now failed in India with every venture. True, it entered with a big bang and picked the right—well, mostly right—spaces to be in like fashion, food, furniture and logistics, but now most of the ventures have either been sold, become irrelevant or are just chugging along.

Its online furniture brand, Fabfurnish, was sold to Future Retail for “almost the same money that there was in the bank", said a person directly involved, on condition of anonymity.

Its food delivery company, Foodpanda, is just coming back from the brink with a new management team. But it’s not in a sweet spot yet with aggressive competition from companies like Swiggy and the food-tech sector itself mired in its own business model issues.

Of Rocket’s other ventures, 21Diamonds was shut down, HeavenandHome got internally merged with FabFurnish and OfficeYes is struggling for traction.

Besides, Rocket also incubated a captive logistics arm GoJavas, which was snatched away from right under its nose by the company’s locally hired founders. GoJavas, which sold a minority stake to Snapdeal in 2015, is no longer owned by Rocket, while an investigation is currently on into how the company’s shares were transferred to a different company promoted by local management without the knowledge of the parent.

So why has Rocket had such a rough time in India and what are the lessons to be learnt from it? It’s simple. Rocket expected its founders to play entrepreneurs while they were mere employees, remotely managed from Berlin.

Rocket hired its founding staff from top-notch consulting firms like McKinsey, paying them far-higher-than-market salaries believing that these people would automatically develop founder-like motivations.

Now, it turns out that this template did not play out well in India. Ultimately, companies are built by founders and founders only, and not by founders-on-hire. The golden rule of entrepreneurship is passion, which comes naturally to a founder for a business he founded. Either you have it or you don’t. It can’t be forced.

Rocket believed it could turn its managers into entrepreneurs (interestingly, they were even designated as co-founders and managing directors). But these managing directors had no “skin in the game", which left little room for staying motivated in a high pressure environment for the long haul. There was no alignment of interest between the founders and the funders, which resulted in a quick churn among its founding staff.

“You can’t put MNC-like deliverables and expect us to behave like founders. If you want me to work like an employee, I will work as an employee," said a former managing director at one of Rocket Internet’s companies. “We were working 24x7 with no equity while we were also getting pulled up for missing a 2am call."

For Rocket, its so-called founders in India are no better than employees. So, little wonder that were major slippages.

There was a time when Jabong sent shivers down the spine of the reigning online fashion leader Myntra, commanding a huge market share compared to Myntra’s. Jabong was the most prized possession of Rocket in India. “We were always told to be like Jabong... ‘look how Jabong is doing’," said the former employee cited above.

But Jabong’s fall has been quick. Its market share has plummeted to a mere 25% as of 2016 and it burns $10 million a month. There have also been huge corporate governance issues unearthed in the company. After the Foodpanda trouble last year, a forensic audit commissioned by Rocket Internet had also revealed several governance-related violations at the fashion portal.

Jabong’s former managing director Praveen Sinha, the company’s ex-CEO Arun Chandra Mohan and former Rocket Internet India managing director Heavent Malhotra were the individuals investigated by Rocket after allegations of financial impropriety were made by a whistle-blower in August 2015. Sinha and Mohan left Jabong around the same time.

The report found “conflict of interest" on the part of Sinha in one of the main aspects of the investigation, mainly to do with the alleged fraudulent transfer of Jabong’s logistics unit GoJavas to an entity controlled by Sinha. Shares in GoJavas were later sold to Jasper Infotech, the parent company of Snapdeal.

Corporate governance issues in the private investment world are not new but have been seen in the case of more mature companies as well. For instance, promoters of Biotor Industries Ltd siphoned off $30 million of Morgan Stanley Private Equity Asia funds, kids fashion retailer Lilliput, backed by TPG Capital, faced corporate governance issues, and retailer Subhiksha Trading Services Ltd drew flak from its investor Premji Invest for its accounting practices.

Such cases are a rarity at younger technology companies and it’s strange that two such instances have happened and both at Rocket Internet companies.

Again, just because a large incubator like Rocket failed in India doesn’t necessarily mean that the incubator model will not work here. It’s about doing it smartly and keeping in mind Indian sensibilities. For instance, Growth Story, a home-grown incubator started by serial entrepreneurs K. Ganesh and Meena Ganesh built along the lines of US-based Y Combinator, has also rolled out a factory model for start-ups. Some of their earlier portfolio companies include BigBasket, an online grocery business, and BlueStone, a custom jewellery e-commerce site, both of which went on to raise substantial amounts of money. In this model, the founder-management also has skin in the game.

So the point is that you can’t buy entrepreneurship, and if you are attempting to, make sure that it’s aligned well.

Shrija Agrawal is Mint’s deals editor. Due Diligence will run every week and cover issues in India’s venture capital, private equity and deals space.

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