Rocket Internet Startups Grow in Revenue but Fail to Attain Profitability

German eCommerce investor Rocket Internet which is considered to be among Europe’s largest internet companies is stuck in a situation where although it witnessing is a strong growth in sales of its major startups, there’s no stopping to the cash burnt by these companies.

 The company model is known as a startup studio or a venture builder

The company was founded in Berlin in 2007 by three brothers: Marc, Oliver and Alexander Samwer, and was once also connected to the European Founders Fund, an associated company(source)

Rocket Internet said in a statement that its top start-ups, which it dubs “proven winners”, have seen their average operating margin rise 6% points in the first half of 2015, although they all continued to make hefty losses.

Although, the company is considered as one of the biggest launch pads for future stock market listings from online fashion to food delivery, several public offerings have been put on hold lately.

The company confirmed that its portfolio value had increased by $3.82 billion since its listing in Frankfurt last October.

First-half revenues for the Global Fashion Group, which incorporates five online fashion firms in emerging markets, rose 63% to $469.5 million, while the operating margin improved slightly to a negative 36.% from 37.4% a year ago, reports Reuters.

Rocket Internet Puts its Major Indian Companies on Sale

Rocket Internet is reportedly to sell three of its major eCommerce companies – Jabong, Foodpanda, and FabFurnish on sale. As per reports, the company has adopted a new strategy and will now directly invest in firms in India through VC fund rather than “incubating startups”.

In July, Vikram Chopra and Mehul Agrawal, Co-founders of FabFurnish, stepped down from the positions of CEO and MD respectively. FabFurnish is struggling hard to compete with  players such as Urban Ladder and Pepperfry which have set a high bar in the market. The company in a statement said, “We plan to reposition to keep pace with the evolving market trends and customer preferences in the near future. In order to achieve this goal, the company has restructured its senior management to bring about a 360-degree reformation in the work culture and organisational composition.”

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Similarly, online fashion retailer which is a part of Global Fashion Group owned by Rocket Internet, is searching for a new CEO as co-founders Praveen Sinha and Arun Chandra Mohan are leaving the company. While Mohan is expected to leave this month, Sinha may exit the company by the year end.

Rocket Internet maintains a strong command over its companies. In fact, all the key decisions taken by the founders of these companies, are directed via the incubator’s headquarters in Berlin. While this kind of a model might work for other markets, in India, it is evidently proving futile. Commenting on the scenario, a former senior executive from one of the aforementioned companies said, “Rocket Internet just failed to anticipate the depth of competition in India. The internet business in India is a different beast altogether.”

Similarly, questioning this model, a fund manager said, “Rocket Internet’s model of owning 90% of a venture simply doesn’t motivate the founders, who, for obvious reasons, are not going to have the same values as that of Narayana Murthy or a Nandan Nilekani. The risk is imminent.”

However, despite such critical comments flowing in from sources closely associated with the German incubator, Foodpanda India CEO, Saurabh Kochhar maintains- “Rocket Internet continues to believe in the Indian internet consumer market. We will continue to be invested.”

iamwire’s Take

In general, Rocket Internet has perpetually bled cash on behalf of its Indian ventures. But none of these companies could attain profitability. For example, Jabong more than doubled its revenue to Rs 811 crore in 2014 but deep discounting led to a five-fold increase in losses. In the year before, the online lifestyle company had faced a gross loss of Rs 32 crore on sales of Rs 344 crore, creating quite a tough situation for its investors. Nevertheless, Rocket Internet has set itself on a very high pedestal not just in India but across the globe owing to its effective execution strategies. It is well on track to start 10 new companies in 2015, nine of which have been launched to date, and as per the H1 2015 Update, the Emerging Stars mostly continued on their promising growth trend.

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Oliver Samwer, Founder and Chief Executive Officer of Rocket Internet commented:

Our Proven Winners continue on their strong growth trajectory in 2015. The H1 financial demonstrate growth as well as improvements in profitability. Rocket’s transition to IFRS shows the strong progress that we have made in terms of financial reporting in the group and our focus on increasing transparency.

Overall, Rocket Internet is pretty comfortably placed despite the fact that some of its startups are struggling to check losses. And this is precisely attributed to the diverse range of portfolios this German company has invested in. Leveraging its mix bag of startups, Rocket Internet could create for itself a huge opportunity to experiment and play in the market with innovative moves.