Oliver Samwer and his brothers have gotten rich - VERY rich - by copying American Web based products and business models and launching them in Germany. Now, with RocketInternet AG he has systematized the copycat model and taken it global. RocketInternet's early October IPO was hyped as Germany's answer to Facebook and Alibaba. Although the IPO was something of a disappointment, it netted the company and its investors €1.6 billion.
The reporters at Venture Beat, a Silicon Valley technology news site, are upbeat about Rocket Internet and its prospects:
"In Silicon Valley, Rocket is often dismissed as a copy-cat artist, making half-baked versions of other people’s ideas. But that misses the point of what Rocket has become and what it cares about. Its real claim to innovation is its methodical approach to identifying digital business models, launching startups, and then growing them quickly. In the last few years, Rocket has created 65 businesses, fueling its own growth that resulted in its recent $1.8 billion IPO in early October.
While Silicon Valley cherishes originality and the romantic notion of the lone founder conjuring innovative ideas, Rocket is focused on speed and size in order to seize opportunities in less sexy markets. Where entrepreneurs in Silicon Valley search for ideas to dazzle their peers, Rocket pursues what it calls “butter and beer” businesses that aim to fill simple, everyday needs of consumers in places where online services are not quite as commonplace as they are in an area like San Francisco."
Fans of RocketInternet point out that Facebook's IPO was also disappointing; today the social media behemoth is a Wall Street darling. And RocketInternet shares have recovered and are trading above the initial offering price. So why am I not buying RKET shares?
1) Lack of Transparency. RocketInternet is an ideal investment for sophisticated Private Equity investors - but not for the general public. It is unlikely that the company could have satisfied SEC regulations for a US listing. What is the small investor buying? We have very litlle ingsight into the startups around the globe that the company is incubating. There is very little information on how the investments in the Rocket's portfolio companies were valued; certainly the valuations were not performed under US GAAP accounting standards. In other words, the investment requires blind faith in the Samwer brothers' ability to execute.
2) Massive losses thus far. Rocket says its “most mature companies, which we refer to as proven winners,” have posted total revenues of €757 million ($955.8 million). But they have also sustained a total of €442 million ($558.1 million) in losses.
3) Low barriers to entry. This is the achilles heel of the "copycat model". If Rocket can imitate successful American ecommerce start-ups, so could local entrepreneurs and angel investors who understand the local market dynamics better than managers in far-off Berlin.
4) Political risk. Rocket is effectively shut out of the US and China, and therefore is forced to set up shop in emerging markets - including highly corrupt countries like Nigeria and Russia. Those are markets the big institutional investors are avoiding like the Eboloa plague. So the question is, what is the exit strategies for Rocket-backed Internet start-ups in countries with non-functioning capital markets? The value proposiiton of Rocket internet depends on lucrative exits for its portfolio companies - either through IPOs or acqusition.
5)Transparency again. American investors rely on quarterly reports (10Qs) to evaluate a company's progress or lack-thereof. But Rocket Internet isn't required to report quarterly results; and its semi-annual reporting requriements are perfunctory.
My recommendation? Sell and avoid RKET.DE and buy YHOO - not so much for its own business prospects, but for its discounted ownership stake in BABA.