BERLIN—In 2011, German tech company Rocket Internet SE spotted a
Swedish web company delivering ready-to-cook meals—recipes and
ingredients packed in a box. So Rocket did what it does best: It
launched a copycat business in other countries.
Its knockoff, HelloFresh, boomed on three continents, including
in the U.S., where it competes against other imitators such as Blue
Apron and Plated. Then trouble hit.
Last November, Rocket pulled the plug on an initial public
offering of HelloFresh, which had been valued at €2.6 billion ($2.9
billion). In May, HelloFresh reported first-quarter losses more
than tripled, to €27.3 million, despite soaring revenue.
It is just one of many deeply unprofitable companies in Rocket's
stable. The company—essentially a publicly traded "incubator" of
startups—has created an empire of 100 companies in 110 countries
with 36,000 employees. Several sell food. Some peddle used cars.
One offers laundry services.
The company is in many respects a microcosm of today's global
web startup scene. At this point, Rocket and its portfolio of
clones are the epitome of the global tech downturn, struggling to
prove that they can be profitable.
In April, Rocket slashed the estimated value of one of its
biggest—Global Fashion Group—from about €3 billion to approximately
€1 billion, citing share-price movement of its peers, its continued
unprofitability and its emerging-markets presence.
The same month, Rocket reported the combined adjusted losses
before interest, tax, depreciation and amortization of eight of its
major companies for 2015 was €1 billion. Investors have dumped
shares. Rocket's stock price is only a third of its peak in 2014.
The stock closed at €18.52 on Friday.
Rocket also is losing a longtime partner and co-investor.
Swedish conglomerate Kinnevik AB had joined Rocket in pouring money
into new companies.
Last year, Kinnevik's chief executive resigned as Rocket's
chairman. A few weeks ago, Kinnevik removed both its directors from
the board, saying the company increasingly was competing with
Rocket for investment targets, and adding that board representation
would be a conflict of interest.
Rocket board Chairman Marcus Englert called Kinnevik's decision
"straightforward and understandable."
Rocket co-founder and Chief Executive Oliver Samwer once was
hailed as Europe's great hope at rivaling the startup prowess of
Silicon Valley. These days, the 43-year-old and his executives are
explaining why Rocket isn't another tech-bubble bust.
In a recent interview Mr. Samwer promised to give investors
better guidance. "The public market is something that we're
learning," he said.
Mr. Samwer said over-aggressiveness led to some mistakes, but he
remained confident in the company's strategy. Rocket startups need
to spend and expand heavily for five to nine years before turning
profitable, he said. Losses are narrowing, and Rocket has plenty of
cash on hand, he added.
Rocket's combined adjusted losses of seven top holdings were
€140 million in the first quarter, compared with €180 million a
year earlier. Aggregate revenue rose to €530 million in the period
from €400 million a year earlier. Rocket said it had €1.8 billion
in cash at the end of last year.
"The core of our DNA is execution," said Chief Operating Officer
Johannes Bruder. "Rocket Internet functions like a factory or
shipyard for start-up companies. You'll see a lot of flow charts
that summarize the systematic process we use to build our
companies."
Rocket was founded in 2007 by Oliver, Marc and Alexander Samwer,
brothers from Cologne, Germany. Their first major success came in
1999 when they started a German clone of auction-website eBay Inc.
They quickly sold it to eBay.
Rocket focuses on startups selling food, clothing and other
merchandise and services via the internet. It begins with a
controlling stake in the startups and either retains those shares
or gradually sells them off to outside investors.
Tweaking its strategy two years ago, Rocket now also invests in
companies it didn't create, mimicking what traditional
venture-capital firms do.
In 2014, Rocket listed itself on the Frankfurt Stock Exchange in
Germany's biggest tech IPO in a decade, raising €1.6 billion at a
€6.7 billion valuation.
On the top floor of its seven-story headquarters, employees
monitor tech startups world-wide for businesses to copy. When an
idea is approved, Rocket assigns marketers, engineers and
managers.
As the business develops, it moves down floor-by-floor,
eventually making it to the ground level, where managers start to
look for offices outside the building.
Rocket assigns a team of its own employees to start a company
and then hires full-time workers for the clone company, which
gradually returns them back to Rocket.
Startups, however, have hit operational and cultural challenges
during their dizzying expansion, and they face new rivals that
copied the idea that Rocket has imitated from others.
"Rocket needs to copy a business model at a point where it's
still in the making," said Simon Schmincke, the former U.S. chief
executive of HelloFresh.
The jury is still out on HelloFresh. The meal service makes
weekly home deliveries of boxes filled with ice packs, gourmet
recipes and enough ingredients for only those recipes.
HelloFresh is battling rivals in the U.S., and rejection in at
least one country, France, where consumers have turned up their
noses at the concept. Two former HelloFresh executives said the
company didn't attract as many subscribers as expected when it
launched five years ago. They said one impediment was that the
service appealed to a niche audience: affluent 20- or 30-something
couples who consistently prepared dinner at home.
Mr. Schmincke, the former HelloFresh executive who is now at a
Swedish venture-capital firm, said he believes the company will
evolve into a profitable business. Oliver Samwer said HelloFresh
and other Rocket-portfolio companies are on track.
Matthias Verbergt contributed to this article.
Write to Stu Woo at Stu.Woo@wsj.com and Friedrich Geiger at
friedrich.geiger@wsj.com
(END) Dow Jones Newswires
July 17, 2016 22:15 ET (02:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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