Rocket Internet — A detailed look An analysis about Rocket Internet
When I started my entrepreneurial career as co-founder of Lieferando.de the name „Rocket Internet“ created that image in your mind of a super-funded online marketing juggernaut. It made you rethink twice of going into a market, sector or industry when you just heard rumours about Rocket Internet just maybe entering the same space. They had the best talent and knew the most about every single marketing channel out there.
In 2016 they have lost all scariness for a number of reasons:
When we started our company in 2009 Rocket had Marketing Rockstars like Andre Alpar, Dominik Wojcik, and Florian Heinemann. These guys defined the competitive advantage when it came to marketing measures such as SEO, SEA or Display. Quality access to marketing know-how was sacred and in the following years coming out of Rocket Internet Marketing was job-safe-card.
In the years following 2009 something else happened: Access to marketing know-how became more accessible, companies like Sociomantic emerged and people out of Rocket Internet like Andre Alpar (AKM3), Elias Russezki (DeltaMethod) and Dominik Wojcik ( TrustAgents) started their own business as agency and eventually gave everyone access to best market SEO, SEA, CRM and Display etc.
Rocket Internets competitive advantage in online marketing in 2016: gone.
The next thing everyone was talking about is their execution excellence. If you dive into some Rocket Internet companies, which is an easy thing to do when you are Berlin native, you will see the following: Rocket starts a new venture, pushes hard almost erratic in every direction, they hire a ton of people and start spending massive amounts of money to gain traction and call it EXECUTION! In my perspective, this has nothing to do with execution, but just access to tremendous amounts of stupid capital. The only way Rocket Internet knows how to execute is a brute-force attack instead of well-executed thought through marketing.
From what you hear people inside of Rocket Internet, there is a huge problem with fluctuation. People are unhappy about the culture and the way Rocket still involves itself in most business decisions. Some insights here: https://www.quora.com/Whats-it-like-to-work-for-Rocket-Internet .They have no entrepreneurs running their companies but managers with an upside incentive. In my opinion and looking at these former consultants they don’t have what it takes to be an entrepreneur. They like the lifestyle, they like calling themselves “entrepreneurs” and they like the vision of building the next “Zalando”. They are purely driven by money — not by the thought of building something great. They are full blown opportunists!
In 2016, Rocket Internet is not longer a sign quality in your CV but something I would worry about.
I have friends who are in the same market/industry as one of Rockets companies. They outperform Rocket in every KPI except funds raised. When you hear that Rocket comes into your market — you should start smiling and just keep calm: they will most likely not succeed — just look at the track record of the recent years. Just stay calm and keep going. They will burn money faster than you can count, they will PR-shit you as much as they can, they will come around asking to buy you — because you are what they don’t have: an entrepreneur running his company with most likely significant better KPIs.
All of the above are the components of Rockets missing success. People might argue that nobody ever raised funds on the level that Oliver Samwer did and what he did for Germany and this is true — but apart from Zalando: Where are the big success story in recent times?
The former approach of copy-build-sell is not working anymore. It worked the last time with Groupon and did not work with copying Stripe, AirBnB… In the following I will take a look at the now discarded category of proven winners. Most of the information is publicly available here:
Westwing
Westwing is in trouble. Huge loss & little growth.
Repeat orders per user on the total user base are declining from 2.0 Orders in 2013 to 1.5 Orders in 2015 which is a decline of 25%. Repeat Order Rate or Order Frequency is fundamental to make this an attractive business and it is fundamental to reach profitability. A decline in the order rate is a good indicator for a weak business model or poor execution.
As shown in the below chart the order rate for active customers is pretty stable and increased from 2.6 order per year in 2013 to 2.8 orders per year in 2015.
The major problem for Westwing is the significant loss in active customers. They lost around 400.000 customers in 2015!
As shown in the graphic you can see that new user growth is steady while sales growth is decreasing but the major concern is the super slow growth of active customers from 800k to 900k.
As in the Order per Customer Chart, this shows a massive problem with User retention. The total customer base has grown around 500k in 2015, but orders only by 300k. This again shows the drop in existing customers and problems in the cohort quality and new customers most heavily substitute lost customer.
Let’s just play around with that number: Let’s make an easy but unscientific calculation: Total loss divided by the real gain on new active customers: That translates to roughly EUR 500 per gained active customer. In the next 6 month, Westwing will be on the tipping point to have lost more customers than gained.
Sales seem to stabilize at decreasing growth rate but let’s assume they will be growing 20% next year and have the same loss because it doesn’t seem that they have their cost under control with EUR 50m operating loss in 2015.
On top Westwing will run into cash flow problems in mid 2016 which will require another capital increase which will further dilute Rocket’s shareholding and the valuation of EUR 480m of December 2014 is not nearly a true indicator of where the business stands. If you look at comparable business One Kings Lane which is trying to sell itself off for $150m after being valued at $900m with 10m members or Temple & Webster in Australia which had EUR 40m in Sales in 2015 and is currently trading at EUR18m — taking these numbers of equally poor performing businesses, the loss, no indicator of reaching profitability, basically no growth and obvious problems with customer retention: a fair value would be something around EUR 100m.
Westwing is nowhere near a winner but more likely a looser.
Home24
Home24 is basically in the same position or even worse than Westwing. From what I hear from sources close to the management, things became hectic when the cash flow planning indicated that they are running out of money in June/ July 2016. The EUR 20m capital raise somehow eased the tension but the internal sources are claiming this is more of a last lifeline, which will not last long. But even without having internal information: all public information is painting a picture of a deeply troubled company. Net Revenue is at EUR 233m in 2015 with a loss of EUR 75m. The total growth of EUR 73m and associated cost of EUR 20m.
The cost in comparison to the net revenue is staying in the same relation to another and are showing that the route to profitability is a long way ahead. Even if they manage to bring the cost down — it will not solve the quality problems and customer retention rate, which will kill Home24 in the midterm. Amongst all Rocket Internet’s businesses Home24 is presenting shocking numbers.
They keep losing customer and in 2015 alone they lost about 800k customers, totalling in 1,4m users who never came back to Home24. This is a total churn of 58,3% of your total user base. With a total cost base of 75m, they only managed to grow their active customer base by 200k users. I am just not sure who this can be seen as a proven winner.
A look at the order rate per customer points in the same direction of unhappy customers. The yearly order rate for an active customer drops from 1.25 orders/yr. in 2014 to 1.20 orders/yr. in 2015. As you can guess the decrease for the for the existing customer base is even more drastically from 0.71 orders in 2014 to 0.5 orders in 2015.
But the biggest shocker is that Home24 is loosing more active customers than gaining new customers on a year on year basis.
As with Westwing: Home24 is hardly a winner and needs a lot of work. Looking at the current developments in customer retention, re-order rates, customer churn and the incredible burn rate Home24 needs some serious adjustments.
On a side note, it is worth mentioning that of all managing directors only Philipp Kreibohm has been with Home24 from the beginning until now. The churn in c-level management is extensive with Felix Jahn, Domenico Cipolla, Constantin Eis and Axel Hefer all gone.
HelloFresh
Known to most of us as the failed IPO candidate this one is interesting. First of all, Rocket is reporting a few numbers, which make the whole business appear a bit bigger than it is.
HelloFresh is reporting Net Revenue — more accurate would be GMV as they are sourcing the food and are only repackaging it. Margins on food are always low and even with the buying power this will present challenging.
Instead of Orders or Transactions as you would expect, HelloFresh is reporting “dishes” delivered. This must be purely to blow up the number of transactions. They are reporting 49.5m dishes, which comes down to an estimate of 5.5m transactions in 2015 based on: 3 meals per week for 3 persons. It is like Foodora or Delivery Hero would report on Meals included in every transaction, which would double their transaction — in dishes. :) The big question to ask is: Why is Rocket not reporting the same metrics across all their ventures?
As with Home24 or Westwing, they are not reporting the total customer base vs. active customer base. I can only assume this is because the ratio is somewhat shocking and is not supporting the business model or at least not the valuation of > EUR 3bn. In this case, they are reporting only the last quarter of existing customers and everyone that did an order — no matter if the user paid for it or not. Again the question is: Why is Rocket choosing different metrics for their MVP?
Let us assume the growth is linear with 1.37m orders in 2014 and 2015 with 5.5m orders. That would result in an Avg. 14.5% growth rate month on month and the Q4 2015 results would be 2.27m orders and Q4 2014 would be 0.46m orders.
On the first look that looks promising with 3.7 transactions per customer per quarter up from 2.7 transactions in 2014. But if we look at the overall transaction in 2015, which are totaling in 5.5m transactions we can make an easy calculation, which shows us why Rocket Internet is hiding the numbers:
If we assume the re-order rate from Q4 2014, which is 2.7 transaction per quarter with a customer base of 0.17 active user. Let’s assume these customers continue to behave like in they did in Q4 2014 — going forward we just multiple the transaction rate by 4 (for 4 quarters) and end up with 10.8 transactions per year, multiple by 170.000 users from the Q4 cohort and we end up with 1.84m transactions in 2015. The net loss for the 137.000 new users in 2014 was EUR 12.2m or cost per user of EUR 89. If we move ahead and look at the actual growth in the customer base, which is 440.000 customers with a total cost base of EUR 86.2m, the cost for a user doubled to EUR 195.
Living in Australia, I can only share my experience with being flooded with HelloFresh coupons day over day and ending up ordering for 30 consecutive weeks for free due to poor marketing.
Lazada
Not much to add to the Techcrunch Articles here
But to summarize it: I think Rocket has to rethink their mission statement as this is so clearly failing that it has something of Monty Python sketch.
Mission: To Become the World’s Largest Internet Platform Outside the United States and China
Review of other businesses
All the above models have some age to them, but also looking at the newer launches of Rockets businesses the indication are quite clear: It is not working. The statement “failed” does not state the actual status of the companies but the status of them being category, market or whatsoever leader or even being an exit with a notable return.
Failed Businesses:
- Bonativo
- Bamarang
- Cardagram
- Pinspire
- Emeza (supposedly rolled into Zalando)
- 5rooms
- Mizado
- Sabunta (supposedly rolled into Jumia) Rocket Internet Consolidates E-Commerce Businesses Amidst Huge Staff Lay-Offs in Nigeria
- Airizu
- Parts of Home24 (still functions in other markets)
- OfficeFab/OfficeYes
- Payleven (still functions in other markets)
- Mebelrama
- YepDoc
- EatFirst
- Wimdu = Failed since it tried to be a competitor to AirBnB, but makes 0,37% of all AirBnBs bookings.
- Helping = Failed as recent lay offs are showing.
- Caterwings
- Vendomo = Failed and closed.
- Nestpick = Failed, fired most of their staff and closed operations in most markets.
- Shopwings
- 21 Diamonds
- Dropgifts
- FabFurnish
- Tripda
- Carspring
- Bonnyprints
I guess the list is even longer but it is a bit tricky to find actual data about closed business and the actual numbers of the smaller businesses of Rocket.
But even the outlook is nothing but shocking: Trying to justify their valuation with a business focusing on selling music instruments: www.bandist.com and a booking engine for campsites www.campday.de seems a bit far fetched.
Let’s see what the future brings for Rocket Internet…
